Why the Bank resisted pressure to fight inflation harder – and what happens next

Despite a false start last November – when the MPC stunned markets by keeping interest rates at record lows – the bank was out of the gates faster than its biggest international peers.

But the US Federal Reserve, the sleeping giant of global monetary policy, recently awoke from its inflationary slumber.

The Fed is now raising rates much faster than the Bank, including a 0.75 percentage point hike on Wednesday. Despite using a similar baseline of 0.25 percent versus the bank’s 0.1 percent, the Fed’s federal funds rate now stands at 1.75 percent – half a point higher than the benchmark rate.

The rise — making it more lucrative for investors to hold dollars — further strengthens the US currency, which has already been boosted by its safe-haven status as markets sold off in response to global monetary policy. It’s a vicious cycle for the British pound, which has fallen to its lowest since lockdown began.

Markets expect the pace to pick up from here, pricing in a series of half-points for the next three sessions, followed by another two-quarter-point rise to take the price to about 3.25 percent next year . Nevertheless, criticism of the MPC is growing.

“Although rarely used, the Governor’s eyebrows remain part of the Bank of England’s armory. Since I left in 2013, mine have been dormant. But the latest inflation rate of 9 percent sent it rising sharply,” Lord Mervyn King, the bank’s former governor, wrote in The Spectator on Thursday.

“Time to talk to those members of the Monetary Policy Committee who were still keen on negative interest rates last year.” Why the Bank resisted pressure to fight inflation harder – and what happens next

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