Bank of England raises interest rates to 2%

Bank of England raises interest rates to 2%

Since the 2008 financial crisis when the banking system collapsed, the Bank of England has raised their interest rates to 2.25% on Thursday, their highest level since the 2008 financial crisis. The government is borrowing hundreds of billions of pounds to support the economy at the same time.

It is a classic response to stagflation, when economic growth slows down but prices keep rising. The central bank hopes to cool demand and reduce price rises by putting interest rates up. The government is in place to support households and businesses struggling to get by at the same time.

Thirty years ago, they used to call it the Ken Eddie show - a reference to the closely coordinated action taken by then Chancellor Kenneth Clarke and Bank of England Governor Eddie George. The last three weeks has been the Kwasi Andy show - with the new Chancellor Kwasi Kwarteng and current Governor Andrew Bailey meeting twice a week to thrash out their response to the crisis.

Concerns have been raised about the independence of the Bank of England under Liz Truss's government. Some degree of acting in concert is helpful. The Bank gave a funding line to cash-strapped energy suppliers earlier this month, in what appears to be a Treasury-inspired idea.

At times, cabinet ministers have gently suggested that rates might not have gone up as fast as they have done. The Bank may decide that the government's massive borrowing-backed rescue package to limit energy bills for businesses and households could actually spark inflation, keeping it elevated for longer and justifying higher rates. It will require a delicate balancing act.

The government has to borrow hundreds of billions of pounds more than previously expected to fund its plans. It will not happen at a time when the Bank of England is buying huge amounts of government debt to support the economy, as it did after the financial crisis and during Covid in a process known as quantitative easing, or QE Then there is the bigger picture. By raising rates to control inflation which is currently 9.9%, the Bank is effectively putting the brakes on the economy at a time when the new government wants to boost economic growth to an annualised rate of 2.5%. The Bank's actions are intended to cool the housing market, just as the government wants to stimulate demand with a stamp duty cut.

The US central bank the Federal Reserve announced on Wednesday that it would keep on raising rates and leave them at elevated levels until inflation falls to the bank's 2% target, and more than that, according to its chair Jerome Powell.

"We're committed to getting to a restrictive level for the Federal Funds rate - US base rates, and getting there pretty quickly," Powell said last night after the Fed announced its third three-quarters of a percentage point rise. The news boosted an already strong dollar, pushing the underperforming pound to a new 37 year low of $1.12.

The levels in the UK are not unthinkable, as they are now near the end of the day. A prime minister who spent a leadership campaign urging the Bank of England to do more on inflation could see that wish granted, although perhaps not quite at the ideal moment.