Bank of England hikes interest rates again as inflation heads ...

London (CNN Business) The United Kingdom's central bank has hiked interest rates for a fifth time since December in a bid to tame spiraling inflation.

The Bank of England said on Thursday that it would raise the cost of borrowing by 25 basis points to 1.25% despite fears that soaring prices are already squeezing households and weighing on economic growth

"Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole, weaker than anticipated at the time of the May Report," the Bank of England said in a statement.

"Consumer confidence has fallen further, but other indicators of household spending appear to have held up. Some indicators of business sentiment have weakened, although they have so far remained more resilient than indicators of consumer confidence and consistent with positive underlying GDP growth," it added.

The central bank said three members of its Monetary Policy Committee wanted to raise rates by 50 basis points to 1.5% — which would have been the biggest increase in 27 years — but were outvoted by the other six.

Governor of the Bank of England Andrew Bailey.

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UK inflation surges to highest level in 30 years | CNN Business

London (CNN Business) UK consumer price inflation has surged to the highest level in three decades, heaping pressure on households already facing a huge increase in energy costs.

Inflation increased to 5.4% in December, the Office for National Statistics said on Wednesday, the highest rate since 1992. The biggest price rises were for transportation, food and beverages, furniture, housing and household goods.

Prices are now rising much faster than pay, making it more difficult for households to make ends meet. Wages increased at an annual rate of just 3.8% in December.

Much more pain is on the way. British consumers face a sharp rise in costs in April, when a cap on energy prices will be raised and taxes are hiked. Households will pay £790 ($1,075) more to heat and light their homes this year, according to Bank of America.

"It's no secret that inflation is going to rise even further," Paul Dales, chief UK economist at Capital Economics said on Wednesday. He expects consumer price inflation to top 7% in April, and to stay above 4% for all of this year.

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Inflation is soaring. Should the Fed unleash 'shock and awe'? - CNN

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New York (CNN Business) The Bank of England has already started to raise interest rates to fight inflation. The Federal Reserve is likely to follow soon. But how aggressive will America's central bank be?

Investors will be looking for clues when chair Jerome Powell holds a press conference after the Fed's meeting on Wednesday. Investors are not expecting the Fed to make a move this week. That's more likely to happen in March.

Higher interest rates make it more expensive for most people and companies to borrow money. That, in turn, leads to a slowdown in consumer and business spending, which usually puts a lid on rising prices.

Most on Wall Street think the Fed will want to take a slow and steady approach to combating higher consumer prices. Raising rates too sharply could hurt the economy and lead to further turmoil in a suddenly skittish stock market.

UK inflation hits 30-year high of 7% | CNN Business

London British consumer price inflation leaped to its highest level in three decades last month, intensifying the pressure on embattled Prime Minister Boris Johnson and his finance minister Rishi Sunak to ease the cost-of-living squeeze.

The annual inflation rate climbed to 7.0% in March from 6.2% in February, its highest since March 1992 and by more than expected by most economists in a Reuters poll, official data showed on Wednesday.

The month-on-month rise was the highest for the time of year since the Office for National Statistics' records began in 1988. Broad-based price rises, ranging from vehicle fuel to food and furniture, were behind the increase.

Households are facing the biggest cost-of-living squeeze since records began in the 1950s, according to Britain's budget forecasters, and the inflation overshoot is further bad news for the government too.

Johnson and Sunak were fined by police on Tuesday for attending a June 2020 birthday party for Johnson at his Downing Street office at a time of COVID-19 restrictions, leading to calls from political opponents for them to resign.

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A For Sale sign is displayed in front of a house in Washington, DC, on March 14, 2022.

What the interest rate hike means for you

The Fed anticipates more rate increases after announcing biggest hike in 28 years

U.S. Federal Reserve Board Chairman Jerome Powell takes questions after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., June 15, 2022.

The logo of German giant Deutsche Bank is seen on their headquarters in Frankfurt am Main, western Germany, on February 4, 2021.

New York CNN Business —

Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a “mild” one.

Now, it’s warning of a deeper downturn caused by the Federal Reserve’s quest to knock down stubbornly high inflation.

“We will get a major recession,” Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take a “long time” before it gets back down to the Fed’s goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”

Behind the curve

Consumer prices spiked by 8.5% in March, the fastest pace in 40 years. The jobs market remains on fire, with Moody’s Analytics projecting that the unemployment rate will soon fall to the lowest level since the early 1950s.

To make its case, Deutsche Bank created an index that tracks the distance between inflation and unemployment over the past 60 years and the Fed’s stated goals for those metrics. That research, according to the bank, finds that the Fed today is “much further behind the curve” than it has been since the early 1980s, a period when extremely high inflation forced the central bank to raise interest rates to record highs, crushing the economy.

History shows the Fed has “never been able to correct” even smaller overshoots of inflation and employment “without pushing the economy into a significant recession,” Deutsche Bank said.

Given that the job market has “over-tightened” by as much as two percentage points of unemployment, the bank said, “Something stronger than a mild recession will be needed to do the job.”

The good news is that Deutsche Bank sees the economy rebounding by mid-2024 as the Fed reverses course in its inflation fight.

Goldman Sachs: Recession is not inevitable

Of course, no one knows precisely how this will play out. Although Deutsche Bank is pessimistic – it’s the most bearish among major banks on Wall Street – others contend this gloom-and-doom is overdone.

Goldman Sachs concedes it will be “very challenging” to bring down high inflation and wage growth, but stresses that a recession is “not inevitable.”

“We do not need a recession but probably do need growth to slow to a somewhat below-potential pace, a path that raises recession risk,” Goldman Sachs economists wrote in a report Friday evening.

UBS is similarly hopeful that the economic expansion will continue despite the Fed’s shift to inflation-fighting mode.

“Inflation should ease from current levels, and we do not expect a recession from rising interest rates,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a report on Monday.

War and Covid lockdowns pressure inflation

Deutsche Bank said the most important factor behind its more negative view is the likelihood that inflation will remain “persistently elevated for longer than generally anticipated.”

The bank said several developments will contribute to higher-than-feared inflation, including: the reversal of globalization, climate change, further supply-chain disruptions caused by the war in Ukraine and Covid lockdowns in China and coming increases to inflation expectations that will support actual inflation.

“The scourge of inflation has returned and is here to stay,” Deutsche Bank said.

If inflation does stay elevated, the Fed will be forced to consider more dramatic interest rate hikes. The Fed raised interest rates by a quarter-percentage point in March and Chairman Jerome Powell conceded last week that a half-point hike is “on the table” at next week’s meeting.

“It is sorely tempting to take a go-slow approach hoping that the US economy can be landed softly on a sustainable path. This will not happen,” Deutsche Bank said. “Our view is that the only way to minimize the economic, financial and societal damage of prolonged inflation is to err on the side of doing too much.”

Fed rate hike 2022: How interest rates will affect mortgages, loans

The Fed raised its key short-term rate from near zero by a quarter percentage point in March.

On Wednesday, the central bank is set to push it up another half point, its largest bump in 22 years.

The move will drive rates higher on everything from credit cards to mortgages.

Just six weeks ago, Americans were facing sharply higher borrowing costs as the Federal Reserve launched an aggressive campaign of interest rate hikes to curb soaring inflation.

Now the Fed is putting those rate increases on steroids, and consumers will have to dig even deeper into their wallets to pay off loans.

What is a recession, and how scared should we be? - CNN

Wall Street is on edge. Central banks are hiking interest rates to try to rein in inflation. And geopolitical upheaval is exacerbating supply chain headaches that began in 2020.

"We will get a major recession," Deutsche Bank economists warned last month , staking out the more bearish position on Wall Street. Bank of America, in the still-grim-but-less-dire camp, said the mood in financial markets has been "recessionary." Goldman Sachs is among the more optimistic of the big banks, but it's not exactly cheery: The tight labor market has "raised the risk of recession meaningfully," it said recently.

Meanwhile, the Bank of England warned Thursday of double-digit inflation and a possible recession as it raised its key interest rate by a quarter percentage point. China's economy, the world's second largest, is stalling, threatening to drag down global growth . And Russia's war in Ukraine is sending energy and food prices through the roof in the EU and beyond.

If history is any indication, the recent run-up in inflation suggests we're due for a contraction. With one exception, every US recession since World War II has been preceded by broadly soaring prices, according to the Congressional Research Service.

So, what exactly is a recession, and how much do you need to worry about it? Let's unpack it.

What is a recession?

First, the textbook definition: A recession is a prolonged period of economic decline, beginning when the economy peaks and ending when it bottoms out.

Recessions are typically marked by an economy shrinking in back-to-back quarters, measured by gross domestic product (aka, how much are we collectively buying and producing as a society). But there are exceptions to that rule, including the brief and exceedingly steep recession the United States entered during the early months of the pandemic. And that technical designation doesn't mean much to anyone who's not an economist (or a politician — someone who is equally if not more interested in avoiding the "R" word than anyone on Wall Street).

The reality of a recession feels is broadly economically gloomy — think rising unemployment, a stock market in decline, and stagnating or shrinking wages. People often rein in spending as gloom sets in, giving recessions a psychological component that can be hard to shake.

For example: Technically, the Great Recession that began in 2007 lasted just 18 months, but the impact of the crisis weighed on consumers far longer.

Economists call this lingering effect, especially in the labor market, "hysteresis." The 2020 recession itself was brief, but its mass layoffs and furloughs, along with a rapid shift to working from home, shattered previous assumptions about the value and meaning of work. Around the world, workers' dissatisfaction with their employers has stirred a movement to seek something better, a phenomenon known as the "Great Resignation."

What causes a recession?

You could spend a career in economics researching and debating this very question. But let's focus on the most pressing risk right now: The Federal Reserve's fight against inflation.

One of the quirks of the modern capitalist system we live in is that when the economy is going too strong, officials have to deliberately hurt it to keep it from going completely off the rails. That's precisely what the Federal Reserve is trying to do right now.

On Wednesday, the Fed raised its key interest rate a half-percentage point, its most aggressive rate hike in 22 years. Interest rates are the Fed's primary tool to control inflation, which is currently hovering at 8.5% — the highest it's been since the early 1980s.

But predicting economic expansions and recessions is notoriously difficult, and the Fed has been historically miserable at it. Late to the "economy is too hot" party, the Fed's job to tame it has become extremely delicate. The bank has to raise interest rates just enough to take the heat off surging prices. Overdo it, and demand could crater, resulting in a recession. Do too little, and prices may keep going up, which would also lead to a recession.

The ideal outcome is known as a "soft landing," in which consumer prices come down and economic growth carries on at a steady clip.

How should you prepare?

First, don't panic: Even if a recession is inevitable, there's no telling how severe it will be. But it never hurts to plan for the worst. Here are a few ways financial advisers say you can insulate your finances from a downturn.

Lock in a new job now: With ultra-low unemployment and plenty of openings, it's a job seeker's market. That could change quickly in a recession.

Cash in on the housing boom: If you've been on the fence about selling your home, now may be the time to list. Home prices in the United States are up nearly 20% year over year, but mortgage rates are also rising, which will eventually curb demand.

Set some cash aside: It's always a good idea to have liquid assets — cash, money market funds, etc — to cover urgent needs or unexpected emergencies.

Finally, some sage advice for any market: Don't let your emotions get the better of you. "Stay invested, stay disciplined," says certified financial planner Mari Adam. "History shows that what people -- or even experts -- think about the market is usually wrong. The best way to meet your long-term goals is just stay invested and stick to your allocation,"

— CNN Business' Matt Egan and Jeanne Sahadi contributed to this report.

Bank of England follows Fed cue over 'easy money'

AP

Central bank will keep record-low interest rate%2C bond-purchasing program for now

Bank of England joins the U.S. Federal Reserve and ECB in providing guidance on interest rates

Unemployment is not expected to fall to 7%25 until 2016

LONDON (AP) — Bank of England Governor Mark Carney said Wednesday the U.K.'s central bank will not consider increasing its record-low interest rate or scaling back its bond-purchasing program until unemployment falls below 7%.

The Bank of England joins the U.S. Federal Reserve and the European Central Bank in providing guidance on their interest rate policies.

Carney, delivering his first quarterly inflation report since he became governor, issued "forward guidance" on interest rates — currently at 0.5% — to avoid "unwarranted . . . expectations."

The 48-year-old former governor of the Bank of Canada stressed to reporters that if unemployment falls to 7% from the current 7.8% — which is not expected to happen until 2016 — it would not automatically trigger an increase in interest rates but would be a "waystation" to reassess bank policy.

By giving an indication that interest rates could stay low — possibly for several years — businesses and families will get a clearer picture of what it would cost to borrow and therefore would be encouraged to take out loans and mortgages, which in turn would help stimulate the economy.

Carney also said the bank would not scale back its 375 billion pound bond-buying program while unemployment remains about 7%.

The BOE warned, however, that it would break the link between rates and unemployment if it fears inflation will climb sharply in the medium term.

Saying that "a renewed recovery is now under way" but that the UK economy has not yet reached "escape velocity," Carney also downgraded inflation forecasts by saying the bank does not expect inflation to rise above 3 percent this year.

Carney took office July 1, becoming the first non-Briton to run the bank in its 319-year history.

Gas prices could soar if Russia invades Ukraine | CNN Business

New York (CNN Business) If Russia invades Ukraine, inflation-weary Americans will likely pay even higher prices at the pump .

That's because Russia is the No. 2 oil producer on the planet , behind only the United States. And Ukraine is a key energy transit hub, where a large amount of Russian natural gas exports to Europe flow through.

An invasion of Ukraine would trigger immediate fears of sanctions from Washington on Russia's vast energy resources, damage to the region's energy infrastructure and raise the specter of Vladimir Putin weaponizing exports of natural gas and crude oil.

Investors would buy first and ask questions later.

"There is a very good chance we would reach $100. That's going to be inflationary with an exclamation point," said Robert Yawger, director of energy futures at Mizuho Securities. "We don't need that at all. We can't afford that at all."

A conflict between Russia and Ukraine would boost gas prices, the head of the International Energy Agency said on Thursday.

"Such a huge geopolitical event would [have] major implications on the gas prices, if not leading to turmoil," IEA Executive Director Fatih Birol told CNNI's Julia Chatterley on First Move.

'All bets are off'

It's impossible to say how high prices would go — and how long they would stay high. But $100 oil would surely lift prices at the pump. And that means a Russia-Ukraine conflict has the potential to impact most Americans.

Gasoline prices, which move with a lag to oil, have already started to creep higher in recent days. The national average hit $3.32 a gallon on Wednesday, up from the recent low of $3.28, according to AAA.

"If there is a war with Russia, then all bets are off," said Claudio Galimberti, senior vice president of analysis at Rystad Energy.

Oil prices are up sharply this week and analysts say concerns about a Russia-Ukraine conflict have contributed to those gains.

"The market has been really slow to appreciate the risks of an invasion," said Helima Croft, head of global commodity strategy at RBC Capital Markets. "Putin is not really a bluffer. He's known for backing words with action."

The White House is talking to energy companies and countries

All of this underscores the difficult situation the White House finds itself in, economically, politically and of course from a national security standpoint.

Inflation is already a major political and economic problem for President Joe Biden. The recent rebound in gasoline prices threatens to further aggravate inflation. And $100 oil in a Russia-Ukraine conflict would make it even worse.

"Whatever we decide is the right course for our collective interest and security," a spokesperson for the National Security Council told CNN in a statement, "we are prepared to deliver severe costs to the Russian economy including its financial system and sectors deemed critical to the Kremlin and President Putin's ambitions -- while minimizing unwanted spillover."

That last part -- mitigating the impact -- could be tricky.

A senior administration official told CNN that officials are taking contingency planning very seriously "to make sure we are prepared to mitigate any impact and assess potential spillovers." That contingency planning, the official said, includes conversations with energy companies and countries.

The administration official added that the White House has been "very clear" about how it would respond to an invasion and "that should already start being priced into the markets."

Natural gas prices could spike

Europeans would pay the biggest price in a conflict. That's because Europe relies on Russia for natural gas. Heating costs in Europe skyrocketed last fall as natural gas futures spiked.

The impact to American consumers is less direct.

Russia ships relatively modest amounts of oil to the United States, totaling just 200,000 barrels per day as of October. That represents just 3% of total US oil imports of 6 million barrels.

However, crude is a globally traded commodity and prices at the pump are based off world oil prices. An oil shock anywhere is felt everywhere.

Not just that, but a spike in natural gas prices overseas would have significant ripple effects.

That's because very high natural gas prices would force some power plants and factories in Europe and Asia to switch away from gas to oil. In other words, demand would go higher for oil.

'Weaponize energy'

At the same time, supply would be in doubt.

First, a military conflict would threaten energy infrastructure in the region.

But even if pipelines and refineries are spared, Russia could decide to slash its supply of natural gas -- or even crude oil.

"Russia can weaponize energy exports -- to make everyone feel the pain," said Croft, the RBC strategist. "A lot of people believe Russia will respond by withholding supply, to make us pay the price."

And then there's the risk that the White House responds to an invasion by slapping sanctions on Russian oil and natural gas.

President Biden warned Wednesday of imposing "severe costs and significant harm" on the Russian economy if Putin invades Ukraine.

"It's going to be heavy, it's going to be real and it's going to be consequential," Biden said.

Biden noted that Russia relies on its oil-and-gas exports for its economy. However, he stopped short of threatening to impose energy sanctions.

Croft, a former CIA analyst, suggested the reluctance of US officials to threaten energy sanctions on Russia is telegraphing a vulnerability to Putin.

"If you carve out energy, you are signaling you're concerned about energy," she said.

Any conflict could work against Russia's future as a dominant gas supplier.

"When you make long-term contracts, you have to trust your partner that under any conditions you will get this gas," noted IEA's Birol.

Sanctions could make inflation worse

Leveling sanctions would be a difficult decision for Biden.

On the one hand, energy is vital to Russia's economy, making it an obvious target for sanctions and a way to make Putin face real consequences.

Crude oil and natural gas made up about 43%, on average, of the Russian government's annual revenue between 2011 and 2020, according to the US Energy Information Administration . Oil and gas revenue spiked by 60% during the first nine months of last year, making them the biggest growth driver for government revenue, according to the World Bank.

"Russia is a one-pony town. Energy is the only thing they have. It's the glaring weakness in their economy," said Mizuho's Yawger.

And yet seizing on that weakness by limiting the supply of Russia's natural gas and oil would drive prices higher at a time when they are already elevated.

"This war situation would be bad enough. But if you start putting sanctions on energy, it just super-sizes the whole inflation story and takes it to the next level," said Yawger. "You would be committing economic, and political, suicide by doing that."

Will OPEC and Big Oil come to the rescue?

Croft, the RBC analyst, said the Biden administration would likely respond to a price spike by releasing more barrels from the Strategic Petroleum Reserve, likely in a coordinated fashion with other nations. That could help cushion the blow.

Biden could also try to convince Saudi Arabia-led OPEC to open the spigots, arguing that very high prices aren't good for producers if they destroy demand.

Analysts say US oil companies, which have up until recently been reluctant to significantly increase production, would respond to $100-plus oil by cranking output.

But that wouldn't translate to more gasoline overnight. And in the meantime, prices at the pump would remain high.

-- CNN's Chris Liakos contributed to this report

UK central bank raises interest rates for first time in a decade

Pan Pylas

Associated Press

LONDON – The Bank of England has raised interest rates for the first time in a decade to contain an increase in inflation stoked by the Brexit vote in what is otherwise a moment of high uncertainty for the economy.

In a statement Thursday, the bank said it had increased its benchmark rate, which affects the cost of loans and savings rates in the wider economy, to 0.50% from the record low of 0.25%.

The hike, which had been widely anticipated in the markets, is the first since July 2007, when world credit markets started to freeze up in what would prove to be the prelude to the global financial crisis.

However, the impact on households and companies will likely be modest, as many home-owners are on fixed-rate loans and the cost of borrowing remains very low by historical standards.

Minutes of the meeting showed that seven members of the nine-strong Monetary Policy Committee judged it “appropriate to tighten modestly the stance of monetary policy” to return inflation “sustainably to target.” Despite the increase, they argued that “monetary policy continues to provide significant support to jobs and activity in the current exceptional circumstances” and that future increases should be gradual and “limited.”

Rate-setters were faced with a dilemma. Though inflation is a full percentage point above the target of 2% and unemployment stands at its lowest level since the mid-1970s, the British economy has come off the boil. It is the slowest among its peers in the Group of Seven industrialized democracies and businesses and households are becoming more cautious amid uncertainty over Britain’s future relations with the other 27 EU nations.

Though Britain is officially due to leave the EU in March 2019, there is mounting pressure on the government to provide businesses with some clarity on the future following Brexit day. Many financial firms, for example, have threatened to start implementing contingency plans to set up operations in Europe or move staff and activities in the early months of next year if there is no progress in the Brexit talks.

The committee agreed there were “considerable risks” to the outlook related to Brexit and said “resolution” of that uncertainty “would prompt a reassessment.”

For now, the committee opted to look past those concerns by taking back the rate cut they pushed through in the aftermath of the Brexit vote to support the economy through the uncertainty and market turmoil of the time.

Above-target inflation lay at the heart of their vote. According to the bank’s quarterly projections, also published Thursday, annual inflation is set to rise to 3.2 percent in October. Anything more than a percentage point above target will require Bank of England Governor Mark Carney to write an explanatory letter to Treasury chief Philip Hammond.

Those new forecasts see inflation falling toward the target, to 2.1 percent, over three years if the key interest rate rises, as expected by investors, to 1 percent. Without any further hike, the bank forecast that inflation would be around half a percentage point higher.

Inflation has been boosted in the past year by the pound’s 15 percent fall since the Brexit vote in June last year, which raised the cost of imported goods like food and energy. That impact is a one-off and is likely to fade in coming months.

But some at the central bank believe that a strong labor marker in Britain could help keep inflation higher, with wages are predicted to pick up to around 3%.

For two of the rate-setters, Jon Cunliffe and Dave Ramsden, there was insufficient evidence that domestic factors like wage increases would be as strong as anticipated, and that’s why they voted to keep rates on hold.

Though the rate rise may not amount to much, it has symbolic value.

“For a whole generation of U.K. households now entering adulthood, it’s a small but important reminder that interest rates can move in an upward direction, even if only slowly,” said Lucy O’Carroll, chief economist at Aberdeen Standard Investments.

Lenders are set to tweak their flexible mortgage rates to take account for the increase in the base rate. However, with more and more people taking out longer-term fixed-rate mortgages, the impact on household spending is not expected to be substantial.

While the rate hike may stretch some household budgets, it will be welcome to savers, who have seen returns sharply diminished in the era of super-low interest rates. Nationwide Building Society, one of the country’s biggest financial institutions, said it will pass on the full quarter-point rise to savers.