Interest Rates and Monetary Policy: Key Economic Indicators

Major central banks around the world are tightening monetary policy in response to rising inflation, initially caused by higher goods and energy prices, as well as bottlenecks in supply chains.

UK (Bank of England)

On 2 February, the Bank of England’s Monetary Policy Committee (MPC) announced it had raised interest rates for the tenth meeting in a row. Rates were increased by 0.5 percentage points to 4.0%. The MPC is increasing rates in response to rising inflation, which stood at 10.5% in December, well above the MPC’s 2% target.

With the MPC’s latest forecasts expecting inflation to fall quickly this year, to 4% by the end of 2023, the cycle of rate increases appears to be nearing its end. However, the MPC warned that “there could be significant upside risks to these projections”, chiefly due to domestic inflationary pressures.

The MPC has started to reduce the size of its asset purchase – or quantitative easing, QE – programme from its recent peak value of £895bn. It is doing this in two ways: by letting some of the government bonds it holds mature; and by actively selling some of the bonds it holds to the market. 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 by the Fed at its policy meeting ending 1 February, taking rates to a range of 4.50-4.75%. The rate at which rates have been increased have slowed as the inflation rate has eased from recent highs (though it remains well above its 2% target). The Fed is reducing the amount of assets it holds in its Quantitative Easing programme by $95bn per month.

Responding to the Covid-19 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). The Fed began to raise rates again in March 2022. 

Eurozone (European Central Bank)

At its 2 February meeting, the ECB raised its main interest rates by 0.5 percentage points. This took the deposit rate up to 2.5%. The ECB has lifted rates by 3 percentage points since they began raising rates in July 2022. With inflation well above its 2% target, the ECB stated its intention to raise rates by a further 0.5 percentage points at its next meeting in March. The ECB will start unwinding its quantitative easing programmes from March, by not reinvesting €15bn per month of maturing assets it holds in one of its two main QE programmes.

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.

In July 2022, the ECB announced the creation of a new bond purchase programme, the Transmission Protection Instrument (TPI). The TPI is designed to be used, if needed, to lower government borrowing costs in individual countries, if these costs are rising due to “unwarranted, disorderly market dynamics”.