(Bloomberg Opinion) -- With the Bank of England raising interest rates for a third consecutive monetary-policy meeting on Thursday, attention now turns to what the government can do via fiscal policy to alleviate the cost-of-living crisis facing Britons. Chancellor of the Exchequer Rishi Sunak should abandon April's planned tax increase, to avoid shell-shocked consumers from driving the economy into recession.
The U.K. central bank was obliged to push up borrowing costs this week, or risk accusations that it was reneging on its remit to keep inflation in check. With consumer prices rising at their fastest pace in 30 years and the inflation rate expected to peak at close to 10% this year, a further increase in the official interest rate to 0.75% was clearly warranted.
The move echoes recent decisions by the Federal Reserve and the European Central Bank, both of which also refused to be blown off their anti-inflationary track by the economic implications of Russia's invasion of Ukraine. The Fed doubled its benchmark rate to 0.5% on Wednesday and signaled six more increases are likely this year. Last week, the ECB scaled back its bond-buying program with a view to ending purchases altogether in the third quarter.
The Bank of England action heralds more pain for cash-strapped U.K. consumers. Mortgage lenders have been jacking up the rates on home loans to reflect the increase in official interest rates. The interest payable on a two-year fixed-rate package — the most common product for U.K. borrowers — has already climbed more than 55 basis points since September. The futures market anticipates a central bank rate of about 2% by the end of the year, heralding higher housing costs.
Moreover, those central bank hikes are doing little for savers. The percentage of U.K. savings accounts paying more than the official rate has plummeted to its lowest since January 2009, according to retail financial data firm Moneyfacts Group Plc. Financial firms looking to preserve their margins are unlikely to pass on much, if any, of this week's increase.
And surging energy prices are hurting drivers. U.K. petrol pump prices posted their biggest increase on record in the week through March 14, Bloomberg News reported this week. The 4.6% jump was the most since records began in 2003.
But the world economic outlook has dimmed as a result of Russia's aggression, which threatens to further disrupt global supply chains and drive up energy costs. Economists surveyed by Bloomberg put the chance of a U.K. recession in the coming 12 months at 25%, the highest in a year.
With monetary policy makers preoccupied with tackling inflation, it's up to fiscal policy to alleviate the crunch. Sunak is scheduled to update Parliament on the government's economic plans on March 23. The simplest move would involve scrapping a 12 billion-pound ($16 billion) increase in National Insurance taxes that's due to take effect next month and is already unpopular with Conservative lawmakers. Increasing the pay threshold at which the levy takes effect is another option; that would help the lower-paid who will be disproportionately hit by a surge in fuel bills that will accompany a planned rise in the energy price cap next month.
The current economic backdrop provides the perfect opportunity for Sunak to show some economic compassion and offset the central bank's justified hawkishness. He claims to be a tax-cutting chancellor; it's time for him to make good on that assertion.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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