The European Central Bank and the Bank of England raise interest rates again in the face of inflation

[ad_1]

London CNN –

Europe’s two largest central banks sharply raised interest rates on Thursday, opting for larger hikes from the US Federal Reserve as inflation in the region remains near historically high levels.

The European Central Bank (ECB) and the Bank of England raised interest rates by another half percentage point. Benchmark interest rates for both are at their highest levels since 2008.

Across the Atlantic, the Federal Reserve eased interest rate hikes on Wednesday, notching up just a quarter of a point as it saw it make progress in its fight against inflation.

The European Central Bank said it expects to raise interest rates further and “intends” to raise them by another half percentage point in March. Although inflation slowed in the 20 countries using the euro in January, at 8.5% it remained well above the bank’s target of 2%.

Speaking to reporters after the announcement, Christine Lagarde, the president of the European Central Bank, noted the recent sharp declines in energy prices, but said the fight to tame inflation must continue.

“The general inflation rate has decreased more than we expected and many expected,” she said. “But the underlying inflation pressure is there, alive and kicking, and that’s why… I’d say we’ve got more ground to cover and we’re not done.”

UK inflation also eased, reaching 10.5% in December, but still near a 41-year high.

The Bank of England faces a particularly difficult task: rates are rising rapidly while the UK simultaneously faces the threat of recession, and higher interest rates dampen inflation and economic growth. The International Monetary Fund predicted on Tuesday that the UK will be the only major economy that will contract this year.

The Bank of England said UK inflation is likely to fall sharply for the rest of the year, largely because previous increases in energy and other prices fell out of the accounts. But she indicated a great deal of uncertainty about her forecast.

“The labor market remains tight, and domestic price and wage pressures were stronger than expected, indicating risks of continued underlying inflation,” the bank said in a statement.

In addition, wholesale energy prices may increase UK inflation more than expected.

On the broader British economy front, the Bank of England has become more optimistic, forecasting a 0.5% drop in output this year compared to the 1.5% contraction expected in November. This is very much in line with the latest forecasts of the International Monetary Fund.

The ECB also released some details about unwinding its asset purchase programme, reiterating that its holdings will drop by 15 billion euros ($16.5 billion) per month on average from March to the end of June.

[ad_2]