The Bank of England Raises Rates Again in a Bid to Corral Inflation
By increasing its benchmark rate a quarter of a point on Wednesday, the Federal Reserve is trying to rein in inflation, which is at a 40-year high. That will set off a domino effect that could affect you directly or indirectly.
What the Fed’s Rate Hikes Mean for You
Tara Siegel Bernardđź’°Reporting on the Fed
What the Fed’s Rate Hikes Mean for You
Tara Siegel Bernardđź’°Reporting on the Fed
The Federal Reserve raised its benchmark rate by a quarter percentage point as it tries to rein in inflation. For now, consumers may feel the sting of higher prices more acutely than the pinch of a quarter-point bump.
Here’s what you need to know →
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The Bank of England raised interest rates to their prepandemic level on Thursday in an effort to combat rapidly accelerating inflation that has been worsened by the war in Ukraine.
The central bank raised rates by 25 basis points to 0.75 percent, the third consecutive increase at a policy meeting, as it forecast that inflation would reach about 8 percent in coming months, and possibly rise higher later in the year. But the decision wasn’t unanimous as policymakers weighed the gloomier outlook for the British economy.
While the war has led to higher energy and commodity prices, pushing up the expected peak in inflation, it is also predicted to cut economic growth in Europe, including Britain. This creates a challenge for the bank. Its goal is to bring inflation, which hit 5.5 percent in January, back down to its 2 percent target, but policymakers want to avoid cooling the economy too aggressively and knocking the nascent post-lockdown recovery off course.
“The global economy outlook had deteriorated significantly following Russia’s invasion of Ukraine in late February, and the associated material increase in the prices of energy and raw material,” the bank said in a statement.
For now, global central bankers are focused on taming inflation. On Wednesday, the Federal Reserve raised U.S. interest rates for the first time since 2018 and projected six more increases this year as inflation soars. Last week, the European Central Bank moved closer to raising its interest rates when it proposed an end date for its bond-buying program. On Thursday, Christine Lagarde, the president of the European Central Bank, said Europe was unlikely to return to prepandemic inflation patterns, which consistently undershot the bank’s target.
For Britain, and Europe, the economic shock of war comes on the heels of an energy price shock that started last fall and just months after the economy regained its prepandemic size.
“The economy has recently been subject to a succession of very large shocks,” the Bank of England said on Thursday. “Russia’s invasion of Ukraine is another such shock.” If energy and commodity prices stay high it will weigh on Britain’s economy.
“This is something monetary policy is unable to prevent,” the bank added.
The bank’s run of rate increases began in December, the first move higher in three and a half years. The rate had been at 0.1 percent since March 2020, when the onset of the pandemic sent financial markets careening and the government first introduced lockdown measures.
On Thursday, the bank said it had raised interest rates in order to stop higher trends in pay and consumer prices from becoming stronger and entrenched.
The bank had previously expected inflation to peak in April when the government’s price cap on energy bills rises. But it now says inflation could be even higher later this year — possibly several percentage points higher because of energy prices.
Even as inflation gets further from the bank’s target, it is unclear how many more rate increases are coming. The central bank reiterated that “some further modest tightening” in monetary policy might be appropriate but added a caveat on Thursday, saying there are risks to this judgment depending on path of inflation.
The pound fell about 0.8 percent from its intraday high against the U.S. dollar after the policy announcement, as traders saw increasing hesitancy in the policymakers’ meeting minutes about tightening monetary policy. There was no longer a suggestion of increasing rates by 50 basis points, which some policymakers had voted for in February, and there was increasing concern about the squeeze on household incomes.
The Bank of England “is being far more cautious than the Fed,” strategists at the Dutch bank ING wrote in a note to clients. “That is a reminder that the U.K., like Europe, is an energy importer and more susceptible to events in Ukraine.”
The ING strategists still expect another rate increase in May, but said the bank might pause after that.
Before the war, there were already concerns in Britain about a cost-of-living crisis. Inflation was outpacing wage growth, energy bills were set to jump higher and tax increases are scheduled for next month. The government is under increasing pressure to reconsider its plans to raise taxes when it announces an update to the budget next week.
Russia’s invasion of Ukraine is “likely to accentuate both the peak in inflation and the adverse impact” on economic growth by “intensifying the squeeze on household incomes,” the central bank said on Thursday.
In February, the bank projected that its measure of households’ net income after taxes and inflation would shrink 2 percent this year from last year. The impact on incomes is “now likely to be materially larger” than this because of higher commodity prices, the bank said on Thursday.
Eight of the nine members voted for the rate increase. Jon Cunliffe, a deputy governor for financial stability, voted to hold interest rates at 0.5 percent because of the “very material negative impacts” on households from higher commodity prices. A broader assessment on this balance between higher inflationary pressures and the worsening outlook for household budgets was needed, he said, according to the minutes of this week’s policy meeting.
Russia’s finance ministry said on Thursday that it had made a $117 million payment on interest due on two U.S. dollar-denominated bonds. The payments are due this week to prevent Russia’s first default on foreign debt since the 1917 Bolshevik Revolution.
The ministry said the payment had been made to a “foreign correspondent bank” on Monday, but it was unclear whether the bondholders will receive the money. The ministry said it would provide an update later from Citibank’s London branch, which it said was the paying agent on the bonds.
The country has about $40 billion in sovereign debt, half of which is owned by overseas investors.
The government has a 30-day grace period to make this week’s payments before a default is confirmed. It has said that if Western sanctions prevent it from paying the money in dollars, it will pay in rubles instead.
Fitch Ratings said on Tuesday that payment in rubles for debt owed in dollars would be considered a default.
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The former cable news anchor Chris Cuomo is seeking $125 million from CNN for what his lawyers claim was wrongful termination when the cable news network fired him in December.
In a legal filing on Wednesday with JAMS, an arbitration organization, Mr. Cuomo’s lawyer, Bryan Freedman, said he was seeking the $15 million that Mr. Cuomo was owed under his contract as well as “future wages lost as a result of CNN’s efforts to destroy his reputation.”
Mr. Cuomo was fired days after the New York attorney general released a trove of emails and text messages that indicated he had been intimately involved with providing strategic advice to his brother, Andrew M. Cuomo, who was confronting a mounting sexual harassment scandal while serving as governor of New York.
Mr. Cuomo was fired by Jeff Zucker, CNN’s president at the time. Mr. Cuomo has maintained that Mr. Zucker was aware of his dealings with his brother, an accusation that Mr. Zucker has denied.
An internal investigation into Mr. Cuomo commissioned by WarnerMedia, CNN’s parent company, soon imperiled Mr. Zucker as well. Mr. Zucker resigned under pressure in early February after the investigation revealed that he had failed to disclose a romantic relationship with the network’s head of marketing and communications, Allison Gollust. WarnerMedia would later say that “the investigation found violations of company policies, including CNN’s news standards and practices, by Jeff Zucker, Allison Gollust and Chris Cuomo.” Mr. Zucker and Ms. Gollust have denied that.
Mr. Freedman, Mr. Cuomo’s lawyer, said on Wednesday that it “should by now be obvious that Chris Cuomo did not lie to CNN about helping his brother.”
“In fact, as the limited information released from WarnerMedia’s investigation makes clear, CNN’s highest-level executives not only knew about Chris’s involvement in helping his brother but also actively assisted the governor, both through Chris and directly themselves,” Mr. Freedman continued.
A CNN spokesman declined to comment. Deadline reported Mr. Cuomo’s legal filing earlier on Wednesday.
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Volkswagen is shifting its focus toward North America, as the fallout from Russia’s attack on Ukraine caused more supply chain headaches for the company in Europe, executives said.
Since the outbreak of the war last month, several of the brands in the Volkswagen Group, including Porsche and Volkswagen, have been forced to suspend production at their plants because of disruptions to supplies, especially the wiring systems essential to the operation of vehicles.
Herbert Diess, the company’s chief executive, said on Tuesday that in response, Volkswagen was “shifting car production to regions such as China and the Americas” to help compensate for the disruptions in Europe and fill a backlog of orders.
Last year a shortage of semiconductors that plagued the industry contributed to a 6.3 percent drop in sales for Europe’s largest carmaker. But the company made more than 20 billion euros ($22 billion) in profit before taxes in 2021, nearly doubling that of the previous year, thanks to a focus on building more profitable higher-end vehicles and lowering expenses.
This year, the company will put a priority on growing in North America, especially the United States, where the 2015 diesel cheating scandal eroded Volkswagen’s reputation. More recently, though, the company’s S.U.V.s, including an electric model, have proved popular among American drivers, executives said.
“Our business is dependent on improvements in the North American market,” Ralf Brandstätter, the chief executive of the Volkswagen brand, said on Wednesday.
Tesla, the most popular maker of electric cars in the United States, remains the strongest competition for Volkswagen, although both General Motors and Ford Motor have popular electric models. Last week, the company unveiled an electric version of the Volkswagen bus, the ID.Buzz, which it hopes will reignite American imaginations in the age of sustainability and #vanlife.
Volkswagen is counting on spinning off its highly successful Porsche division in the last three months of the year, which could give it more financial flexibility in the uncertain environment.
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In raising interest rates on Wednesday, the Federal Reserve joined a group of global peers taking this step to tackle uncomfortably high inflation.
But monetary policy is being tightened when the outlook for the global economy is darkening because energy and commodity prices have surged higher since Russia’s invasion of Ukraine. Last week, the International Monetary Fund said the war and sanctions on Russia were likely to cause a downgrade of its global growth forecasts.
It is making the job of central bankers harder. While their mission includes keeping inflation stable — usually targeting an annual rate of 2 percent — they also don’t want to cool the economy too much and destabilize the postpandemic recovery.
On Thursday, the Bank of England is expected to raise rates for the third consecutive policy meeting. Last month, when the benchmark rate was raised to 0.5 percent, the bank’s governor, Andrew Bailey, said officials had made the move not because the economy was “roaring away” but because it was the only way to slow inflation. The annual inflation rate in Britain climbed to 5.5 percent in January, outpacing wage growth and fueling concerns that price increases would push people into poverty as households struggled with higher energy bills and grocery costs.
The Bank of Canada raised interest rates this month to 0.5 percent, from 0.25 percent, where they had been since the start of the pandemic in March 2020. Economists expect further rate increases as inflation climbed to 5.7 percent last month, well above the central bank’s target. In the past few months, central banks in Poland, Norway, New Zealand and South Korea have also raised rates.
In the eurozone, where inflation is at 5.8 percent, the European Central Bank has moved one step closer to increasing its interest rates for the first time in a decade. Last week, it proposed an end date for its bond-buying program, a precursor to higher interest rates, which are currently negative. Purchases will stop in the third quarter if the inflation outlook doesn’t weaken.
But the war in Ukraine, which has exacerbated rising energy and food prices, has clouded the outlook. German business leaders are increasingly fearful of a recession. While inflation is expected to stay elevated for longer, the European Central Bank has cut its expectations for economic growth.
“The risks to the economic outlook have increased substantially,” Christine Lagarde, the president of the bank, said last week.
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Wall Street swung between gains and losses on Thursday, after stocks posted their best two day showing since April 2020.
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The S&P 500 fluctuated in early trading after a 2.2 percent gain on Wednesday and a 2.1 percent jump on Tuesday. European stock indexes edged lower on Thursday, with the Stoxx Europe 600 down 0.3 percent.
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The Federal Reserve raised interest rates by a quarter percentage point on Wednesday and said it expected six more increases this year. Concerns over when the central bank would start raising interest rates, and how aggressively it would do so, have loomed over the stock market since the start of the year.
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The Bank of England on Thursday raised its benchmark interest rate for the third time since December as the British economy contends with rapid inflation. The central bank lifted rates by a quarter of a percent to 0.75 percent.
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Oil prices climbed on Thursday after several days of declines, with Brent crude, the international standard, up 7.2 percent to $105.10 a barrel.
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Russian officials announced the finance ministry made a $117 million payment on interest due on two U.S. dollar-denominated bonds. Russia is at risk of default after Western countries imposed broad sanctions over its invasion of Ukraine.
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Amazon said on Thursday that it had closed its acquisition of the movie studio Metro-Goldwyn-Mayer. The deal gives Amazon partial ownership of the James Bond franchise as it looks to bolster its streaming service, Prime Video. European antitrust regulators approved the transaction earlier this week.
Source: https://www.nytimes.com/live/2022/03/17/business/stocks-economy-inflation-ukraine
