Interest Rates and Monetary Policy: Key Economic Indicators

Major central banks around the world are facing rising inflation, as commodity prices rise and supply bottlenecks disrupt global trade.

UK (Bank of England)

On 5 May, the Bank of England’s Monetary Policy Committee (MPC) announced it had raised interest rates for the fourth meeting in a row. Rates were increased by 0.25 percentage points to 1.0%, the highest they have been since March 2009. The MPC is increasing rates in response to rising inflation, forecast to peak at over 10% towards the end of the year, well above the MPC’s 2% target.

The MPC has started to reduce the size of its asset purchase programme (known as quantitative easing, QE) from its peak value of £895bn. QE consists of the Bank creating new money electronically (as central bank reserves) and then using it to purchase financial assets, mostly government bonds.

In March 2020 the Bank introduced measures in response to Covid-19. Interest rates were cut to 0.1% – the lowest they have ever been. They remained at this level until December 2021. The MPC also expanded its quantitative easing (QE) programme by £450bn in 2020 and 2021, taking the total value of assets it owned to a peak of £895bn. For more, see section 4.2 of the Library briefing paper, Coronavirus: Economic impact.

United States (Federal Reserve)

Interest rates were raised by 0.25 percentage points to a range of 0.25-0.5% at the Fed policy meeting ending 16 March, the first rate rise since 2018. The rate hike comes against the backdrop of inflation being at a 40-year high. The Fed stopped purchasing assets (as part of its QE programme) in March 2022.

Interest rates were raised by 0.5 percentage points – the biggest increase since 2000 – to a range of 0.75-1.0% at the Fed policy meeting ending 4 May. Further rate hikes are expected during 2022, as inflation is well above target. The Fed will reduce the amount of assets it holds as part of its Quantitative Easing programme, at a rate of up to $47.5bn per month from June and then up to $95bn from September.

Responding to the pandemic, the Fed had by 15 March 2020 cut interest rates to close to 0% from 1.5%‑1.75% prior to the pandemic. On 23 March 2020, the Fed announced a wide range of measures designed to support the economy. This included buying debt from the government, corporations and purchasing other securities (such as those backed by mortgages and other assets).

Eurozone (European Central Bank)

At its 14 April meeting, the ECB left its main interest rates unchanged at 0.0%, and −0.5% (for overnight deposits from banks). Against the backdrop of rising inflation, the ECB confirmed its plans to reduce the size of its planned assets purchases (QE) over coming months and stop new purchases at some point in the third quarter of 2022. The ECB ended its bond purchases from its separate €1.85 trillion pandemic-related quantitative easing programme in March.

The ECB launched its pandemic response on 12 March 2020 and expanded it significantly on 18 March and 4 June. The ECB has also made cheap loans available to banks to encourage them to lend to businesses.