The recent political turmoil in Britain has served a warning here. Last month, the Bank of England raised rates by three-quarters of a point because policymakers expected the fiscal plans of Liz Truss, the former prime minister, which included a plan to freeze household energy bills for two years, to add to inflationary pressures. After her turbulent premiership ended, Prime Minister Rishi Sunak and his government revoked nearly all of her policies and announced a 55 billion pound ($68 billion) plan for higher taxes and spending cuts. The overall impact of these measures on inflation is expected to be small, the Bank of England said on Thursday.
These central banks are planning to forge a path with higher interest rates even as economic growth across the region deteriorates, and much of the impact of past rate increases hasn’t been felt yet.
In Britain, two policymakers, Silvana Tenreyro and Swati Dhingra, voted to hold rates steady, arguing that higher interest rates were already tightening financial conditions, and cited the weakness in the economy from incomes lagging far behind inflation. It was the first time since March that any committee members had voted to keep rates on hold.
The bank predicts that the economy is already in a recession that will be “prolonged.” Households are contending with the highest food price inflation in more than four decades, combined with a jump in mortgage costs and higher energy bills. As wages fall far behind inflation, workers in many sectors are holding walkouts. This week, railroad workers, postal delivery staff and nurses were among those on strike.
The E.C.B. said that the eurozone economy might contract this quarter and the next one because of higher energy costs, economic uncertainty and the impact of tighter financial conditions. The bank’s staff lowered its forecasts for the eurozone economy next year, predicting it would grow 0.5 percent, down from a previous forecast of 0.9 percent.
Although the European Central Bank had previously emphasized that it had raised interest rates by a historical amount already, these concerns were pushed aside this month as the bank’s forecasts showed inflation still exceeding the target in 2025.
“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” the E.C.B. said on Thursday.