The Bank of England (BoE) raised interest rates by a colossal 0.75 percentage points on Thursday – its most aggressive rate hike since 1989 – as the central bank steps up its efforts to cool the UK’s red-hot inflation.
The BoE has hiked eight times in a row at a time when the central bank has described the economy as being in a recession. The decision underscores the challenges faced by many central banks around the world as they attempt to rein in damaging levels of inflation while also hoping to avoid plunging their economies into a deep and prolonged recession.
The press release that accompanied the BoE’s decision contained some interesting language. The bank's forecasters see inflation falling well below 2% in the next year, which could be a sign that the central bank is preparing to take its foot off the rate-hiking pedal. Click To Tweet
There may be some light at the end of the tunnel for the UK’s borrowers. This news will be welcomed by one particularly indebted nail-biter: the UK government.
See, its debt mountain has drifted to around 100% of its gross domestic product, or GDP (generally, the broadest measure of the total goods and services produced by an economy in a given year), which itself is about three times the country’s income from tax receipts.
It’s not so bad if you think of that debt like a mortgage. But here’s the thing: higher interest rates only make it harder to pay off a high debt load, and the UK doesn’t have a giant country-sized house it can sell to repay what it owes if it runs into trouble. So that 100% – it’s high.
Although the UK’s overall income is much more secure than any one household’s, the fact that its obligations are not backed by an asset like a house or a car means that its creditworthiness is a matter of trust.
Don’t expect the belt-tightening tone from UK finance chiefs to change anytime soon. However, if the Bank’s projections for inflation are accurate, then borrowers across the country – including the government – may eventually see some better news.
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