How the Bank of England is battling inflation compared to the Fed

Economists are sounding the alarm, saying a global recession is just around the corner. Central banks have been upping interest rates in an attempt to mitigate the potential damage — but in the UK, the Bank of England has been accused of dithering. How does its approach to tackling inflation compare to other countries?

The world’s inflation fears aren’t going to go away any time soon. UK inflation hit a 30-year high in February, with the consumer price index rising 6.2%, compared to January’s 5.5% increase. This week, famed investor Ray Dalio warned that the US economy is heading for a period of “stagflation” — two days later, the Central Bank of Ireland warned that the country was heading for a second wave of inflation, as the price of food is set to soar.

 

Across the world, people are seeing their utilities, food and petrol bills ticking up. And it doesn’t stop there: according to a recent poll from the British Chambers of Commerce, more UK businesses are planning to increase their prices than at any time since the 1980s.

Across the world, central banks are upping interest rates in order to try and avoid economic catastrophe. But while the US Federal Reserve is talking about aggressive rate rises, the UK’s Bank of England has been accused of acting like an “unreliable boyfriend” — due to its surprise initial reluctance to increase interest rates at the end of last year.

What has it done to tackle inflation so far, and how does the Bank of England’s approach differ to other central banks around the world?

The Bank of England’s dovish approach to tackling inflation

In November, the Bank of England surprised the markets when it decided to leave interest rates as they were, despite warnings that measures were likely needed to avoid inflation.

Following the announcement, the pound fell by 1.5% against the dollar, while investors complained that the bank had been misleading with its communications.

Understanding how the banks might act is important for investors, as it can indicate where they should be putting their money. Banking stocks, for example, can be more attractive in a high interest rate environment.

Steve Massocca, managing director at Wedbush, says the Bank of England has been “somewhat reluctant” to really tackle inflation. “Obviously, higher rates are not great for economic growth, but neither is inflation,” he adds. “The main risk is that [central] bankers restrain monetary policy to the point where a recession is created.”

And that’s exactly where the UK economy seems to be heading. On 6 April, Sanjay Raja, chief UK economist at Deutsche Bank, said the probability of a recession in the UK has risen, thanks to fresh supply chain disruption along with inflation.

“The main risk is that [central] bankers restrain monetary policy to the point where a recession is created” - Wedbush managing director Steve Massocca

The Bank of England has changed its tune since November, raising interest rates three times since the start of this year, to currently sit at 0.75%. JPMorgan [JPM] now forecasts that the Bank of England will “hike interest rates at the quickest pace since 1988”, according to CityAM. The bank thinks interest rates could be as high at 1.75% by the end of the year, the highest level since December 2008.

Still, the UK’s Monetary Policy Committee (which votes on the Bank of England’s proposed rate rises) has been accused of avoiding action and expecting inflation to take care of itself.

By contrast, the US Federal Reserve has taken a more “bombastic” approach, says Oscar Williams-Grut, city editor at the Evening Standard. He says that chair Jerome Powell’s statements on inflation channel the same energy as former chair Paul Volcker, who raised interest rates to 20% within a year in the 1970s, in order to short circuit inflation. The Fed raised interest rates by 0.25% last month, and it is expected to increase them six more times this year.

How the world’s central banks are responding

Across the world, there has been an array of responses to the challenge of rising inflation.

In March, Reuters reported that the European Central Bank is waiting until Q4 to decide if it should raise rates or not. However, a source recently told the Financial Times that attitudes are shifting at the ECB: “We cannot be the only central bank not reacting,” they said.

The Bank of Japan is “the real outlier”, says Wedbush’s Massocca, in that it “seems to be ignoring inflation”. “The only major central bank still in expansion mode is the BOJ,” he adds.

Indeed, Bank of Japan board member Asahi Noguchi announced this week that the bank “must maintain an ultra-easy monetary policy”, as reported by Al Jazeera. The Bank of Japan introduced negative interest rates in 2016, in a bid to increase spending. As a result, many companies in Japan are reluctant to increase prices.

Whether the gamble will pay off remains to be seen. In March, as other countries raised interest rates, the yen hit a seven-year low against the dollar.