Interest Rates and Monetary Policy: Key Economic Indicators

Major central banks around the world are tightening monetary policy in response to rising inflation, as commodity prices rise and supply bottlenecks disrupt global trade.

UK (Bank of England)

On 22 September, the Bank of England’s Monetary Policy Committee (MPC) announced it had raised interest rates for the seventh meeting in a row. Rates were increased by 0.5 percentage points to 2.25%. The MPC is increasing rates in response to rising inflation, which it forecasts to peak at just under 11% in October, well above the MPC’s 2% target. The outcome of the MPC’s next meeting will be announced on 3 November.

The MPC has started to reduce the size of its asset purchase programme (known as quantitative easing, QE) from its recent 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 0.75 percentage points by the Fed for the third successive policy meeting. This took rates to a range of 3.0-3.25% at the policy meeting ending 21 September. Further rate hikes are expected during 2022, as inflation is well above its 2% target. The Fed is reducing the amount of assets it holds as part of its Quantitative Easing programme, at a rate of up to $47.5bn per month since 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 8 September meeting, the ECB raised its main interest rate by 0.75 percentage points to 0.75%. This follows a 0.5 percentage point increase at its previous meeting. With inflation rising well above its 2% target, the ECB has signalled further rate increases are likely. In July, 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”. The ECB recently ended new asset purchases from its 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.