Is the Bank of England falling behind the curve with interest rate hikes? -
interest rate hikes

Is the Bank of England falling behind the curve with interest rate hikes?

Over recent months, the Bank of England has hiked interest rates five times, taking them from just 0.1% in December 2021 to 1.25% following the latest rate hike in June. Like other central banks around the world, the BoE has increased rates in a bid to tackle soaring inflation, which is at its highest level in decades. However, despite the series of rate hikes already seen in the past six months, a major global finance company believes that the central bank could be lagging regarding rate increases. According to Swiss Re, an international finance house, the BoE is further behind the curve than all other central banks.

The report comes just after the central bank decided to increase the base rate by a further 25 basis points earlier this month. Following the increase, officials from Swiss Re said that the central bank is moving far too slowly to achieve its goal of bringing inflation back down to the 2% mark.

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economic growth

More policy tightening to come

Officials from the finance house said that while central banks have already been increasing interest rates, there is more policy tightening to come. They added that the BoE could not afford to be left behind if it wanted to stand any chance of moving toward its inflation target. Swiss Re even suggested that the Bank of England’s interest rate should be set as high as 10% because of the level of inflation in the UK.

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Jérôme Haegeli, Swiss Re Group’s Chief Economist, said, “The most significant central bank tightening cycle in decades has begun and we expect much more policy tightening to come this year and next. We believe central banks will press ahead with policy tightening even as growth slows, until there is a significant decline in inflation momentum.”

interest rate hikes

Swiss Re added that other developed central banks were also below suggested levels when it came to setting interest rates based on rising inflation. Haegeli said, “Approximations of an adequate interest rate policy, proxied by our estimates of the Taylor rule, suggest that almost all major advanced economy central banks are at least 2ppts below interest rate levels that would be warranted given the current economic environment.”

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BoE more concerned about economic growth

Before the recent Monetary Policy Committee meeting, after which the Bank of England announced the 0.25% increase, some experts had expected a more significant increase of 0.5%. However, some economists now believe that the BoE is more concerned about stimulating economic growth than controlling soaring inflation levels. They believe this is why interest rate increases since December have not gone above 0.25%.  

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