The pound sterling sank against the dollar this Thursday, hours before the Bank of England announce an expected rate hike to combat the skyrocketing inflation and the cost of living crisis in the United Kingdom.
In morning operations Londonthe pound sank 1.2% to $1.1254.
It is expected that the Bank of England today announce its biggest interest rate hike in three decades, as it seeks to counter stubbornly high inflation fueled by Russian invasion of Ukraine and the failed economic policies of the former prime minister Liz Truss.
Economists expect the bank to raise its key interest rate by at least three-quarters of a percentage point, up to 3%, after consumer price inflation hit a 40-year high again in September. In addition, the prices of natural gas Wholesale prices, though down from their August peak, will likely rise again this winter, pushing up energy bills and further fueling the cost-of-living crisis.
The interest rate decision is the first since the Truss government announced 45 billion pounds ($52 billion) of unfunded tax cuts, sparking turmoil in financial markets, driving up mortgage costs and forced Truss out of office after only six weeks. his successor, Rishi Sunakwarned that there will be spending cuts Y tax increases in their attempt to undo the damage and show that Britain You agree to pay your bills.
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The rate hike will probably be the eighth consecutive Bank of England and the largest since 1992. It comes after the United States Federal Reserve announced a fourth consecutive three-quarter point hike on Wednesday, at a time when central banks around the world grapple with inflation that is eroding living standards and slowing economic growth.
The uk central bank could choose to raise rates to one percentage point to show he is serious about fighting inflation, after facing criticism for being slow to react earlier in the year, he told AP Luke Bartholomew, Senior Economist at abrdn.
“The Bank of England will seek to look beyond the volatility caused by government policy and gas price movements, and focus on underlying inflation pressure,” Bartholomew said in a note to investors. “However, given the impact on household spending of these large inflationary moves, and the risk to inflation expectations, it adds a further complication to an already very difficult policy decision for the bank.”
Central banks have struggled to contain inflation after initially believing that the price increase was due to international factors beyond their control. His response intensified in recent months, as it became clear that inflation was entrenching itself in the economy, fueling rising borrowing costs and demands for higher wages.
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The war in Ukraine shot up the prices of foods and energy around the world as shipments of natural gas, cereals Y oil to cook. This was on top of inflation that began to accelerate last year as the global economy began to recover from the COVID-19 pandemic.
Europe has been hit particularly hard by rising natural gas prices, as Russia responded to Western sanctions and support for Ukraine by cutting shipments of the fuel used to heat homes, generate electricity and power industry, and European countries they competed for alternative supplies on world markets.
The United Kingdom has also had problems, since the wholesale gas prices quintupled in the 12 months through August. Although prices are down more than 50% from the August peak, they are likely to rise again during the winter heating season, exacerbating inflation.
The British government tried to protect consumers by capping energy prices. But after the uproar caused by Truss’s economic policies, the Treasury chief, Jeremy Huntlimited the price cap to six months instead of two years, which ends on March 31.
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Meanwhile, the food prices have shot a 14.6% in the year to September, led by the rising cost of staples such as meat, bread, milk and eggs, according to the Office for National Statistics. This has made the inflation of the consumer prices be of the 10.1%the highest since early 1982, and equal to the level last reached in July.
Rises in the cost of tea bags, milk and sugar mean even the “humble” cup of tea is getting more expensive, the British Retail Consortium.
“Although some supply chain costs are starting to come down, this is more than offset by the cost of energy, which means there are looming hard times both for the retailers as for the homes”, said Helen Dickinson, executive director of the consortium.
The failed economic plan of Truss made things worse, leading to pound to a record low against the dollar, threatening the stability of some pension funds and triggering predictions that the Bank of England would raise interest rates more than expected. This increased mortgage costs as lenders changed the price of their products.
The economic turmoil is putting the home ownership further out of reach for many young people, according to a study published this week by hamptonsa UK real estate agency.
Mortgage interest rates are hovering around 6.5%, down from 2% a year ago.
That means the average first-time homebuyer would have to put down a down payment equal to 41% of the purchase price to keep their monthly payments at the same level as a similar buyer who made a 10% down payment last year, Hamptons said. .
In this context, the governor of the Bank of England, Andrew Baileysaid last month that policymakers “will not hesitate” to raise interest rates to bring inflation back to the bank’s 2% target.
“As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought back in August,” Bailey said Oct. 15 in Washington.
(With information from AP)
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