“Surprise, surprise!”, says Ipek Ozkardeskaya of Swissquote. Last month the Bank of England failed to raise interest rates despite market bets that it would. This month it has pulled the reverse trick, becoming the first big central bank to raise the cost of borrowing. The 0.15 percentage point rise to 0.25% came despite market bets that Omicron-related uncertainty would cause the Bank to keep policy steady. With inflation at an annual rate of 5.1% and predicted to hit 6% next April, the Bank decided it didn’t have the luxury of waiting for more clarity about Omicron.
Fighting for credibility
The interest rate rise is so “marginal” that it is “frankly… unlikely to make much of a difference”, says Jeremy Warner in The Daily Telegraph. All the same, it is an important signal of intent. After a year spent making increasingly unconvincing excuses for soaring inflation, Threadneedle Street needed to head off speculation that its real objective is to keep government borrowing costs low. The Bank has now shown that “it won’t back excessive spending forever”.
Even those of us who have long supported tighter policy must admit that “this was not a great time” to start raising rates, says David Smith in The Sunday Times. UK “growth was stagnating even before Omicron” and inflation has surged, suggesting a “touch of… stagflation”. The service sector is having a nightmare before Christmas. “By raising rates at a difficult time”, the Bank has at least “won back” some of its lost credibility as a central bank that takes inflation seriously.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Omicron or no Omicron”, the Bank had no choice but to raise interest rates, says Liam Halligan in The Daily Telegraph. Inflation is more than two times the 2% target. November’s rate-rise-that-wasn’t debacle had raised serious questions about Threadneedle Street’s willingness to both raise the Treasury’s borrowing costs and to upset market traders, who love easy money. Credibility is “a must-have for any effective central bank”: if businesses and consumers come to believe that authorities will never act against inflation then it will become “a self-fulfilling prophecy”.
Fed turns hawkish
The US Federal Reserve is also in tightening mode. It says it will reduce its monthly asset purchases twice as fast as previously planned. That leaves the Fed on course to wind up its quantitative-easing programme (whereby it buys bonds with printed money) and start raising US interest rates next spring. The Fed’s latest projections show it plans to raise interest rates up to three times during 2022.
For all the fanfare about its newfound hawkishness, “the Fed has effectively committed not to raise rates above 1% in 2022”, says Philip Pilkington on Unherd. Yet annual US inflation is 6.8%. “I do not envy the job of central bankers these days.” Policymakers are stuck between the rock of raising rates sharply, which will cause a market crash, and the hard place of doing nothing, which will let inflation rip. The Fed’s solution? “Magically assuming in their projections that inflation will disappear” by itself.
-
Reeves told scrapping pension salary sacrifice would cost average earner £377 a yearMPs – including chancellor Rachel Reeves – have received a letter warning of the dangers in reducing or removing salary sacrifice schemes for pension contributions, a plan under consideration by HMRC.
-
Equity release jumps 4% amid growing inheritance tax concerns and sticky inflationThe amount of money withdrawn by equity release has increased, but the total number of plans has fallen
-
The Stella Show is still on the road – can Stella Li keep it that way?Stella Li is the globe-trotting ambassador for Chinese electric-car company BYD, which has grown into a world leader. Can she keep the motor running?
-
LVMH is set to prosper as the wealthy start shopping againAfter two years of uncertainty, the outlook for LVMH is starting to improve. Is now a good time to add the luxury-goods purveyor to your portfolio?
-
Japan is still rising to new highs – here's how to investOpinion Political ructions in Japan are no obstacle to gains, and the return of inflation may even benefit stocks, says Max King. What is Japan doing right?
-
Investors need to get ready for an age of uncertainty and upheavalTectonic geopolitical and economic shifts are underway. Investors need to consider a range of tools when positioning portfolios to accommodate these changes
-
Investing in UK universities: how to spin research into profitsUK universities are a vital economic asset, but they are also Britain's 'equivalent of Gulf oil.' There are opportunities here for investors
-
Lessons from Nobel Prize winners in economics on how to nurture a culture of growthThe Nobel Prize in economics went to three thinkers who show us why economies grow and how we can help them do so. Governments would be wise to heed the lessons
-
'It’s time for Rachel Reeves to secure her legacy'Opinion Rachel Reeves has been a dreadful chancellor, and it's hard to see her remaining in office for another whole year. She could at least depart with some dignity
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
