US makes biggest interest rate rise in 22 years

The US central bank has announced its biggest interest rate increase in more than two decades as it toughens its fight against fast rising prices.

The Federal Reserve said it was lifting its benchmark interest rate by half a percentage point, to a range of 0.75% to 1% after a smaller rise in March.

The Bank of England is also widely expected to raise rates on Thursday, which would be the fourth increase since December.

With US inflation at a 40-year high, further hikes are expected.

The push marks the latest effort to contain spiking costs being felt by households around the world.

India's central bank on Wednesday announced a surprise increase to its benchmark rate, while Australia's central bank recently enacted its first interest rate hike in more than a decade.

"Inflation is much too high and we understand the hardship it is causing," Federal Reserve chairman Jerome Powell said in a press conference in Washington on Wednesday.

"We are moving expeditiously to bring it back down."

By raising rates, banks will make it more expensive for people, businesses and governments to borrow.

They expect that to cool demand for goods and services, helping to ease price inflation.

But their actions also risk triggering a sharp economic slowdown, especially as new challenges emerge, such as the war in Ukraine and recent Covid shutdowns in China.

"It's a narrow path they have to walk," said economist Donald Kohn, who previously served on the Fed's rate-setting committee. "It's going to be a very difficult task."

Inflation in the US hit 8.5% in March, the sharpest annual rate since 1981, driven by accelerating costs for food and energy.

That is well above the bank's 2% target and has become a growing political issue for US President Joe Biden.

Many economists say the Fed has been slow to respond to the problem, which has been fuelled by a mix of factors, including Covid-related supply shortages, a shock to energy markets from the war in Ukraine, and in the US, massive government spending - including direct cheques to households - to support the economy after the pandemic hit.

"They are well behind the curve. I think most central banks are," said Thomas Hoenig, senior fellow at George Mason University's Mercatus Center, who spent nearly 40 years at the Fed.

"But if they try to correct that error with another error - that is to shock the economies with very large interest rate increases - I think they'll pay a pretty big price in terms of a probable recession from that."

The rate increase announced on Wednesday was an unanimous decision. It will push what the Fed charges banks to borrow to a range of 0.75% to 1%, with the higher costs rippling out to consumers in the form of more expensive mortgages, credit cards and other loans.

In addition, the bank detailed plans to remove economic support by winding down its balance sheet, which swelled during the pandemic as it purchased assets, including US government debt and mortgage-backed securities, to boost the economy.

Starting in June, the bank said it would reduce its holdings by $47.5bn per month, increasing to $95bn in September.

Source: BBC News.