The US Federal Reserve has approved another sharp increase in interest rates as it struggles to contain rapidly rising prices.
The Federal Reserve announced a 0.75 percentage point increase in its key interest rate, bringing it to its highest level since early 2008.
The bank believes that raising borrowing costs will cool the economy and reduce price inflation.
However, critics are concerned that the moves will precipitate a severe downturn.
The latest increase takes the bank’s benchmark lending rate to 3.75% – 4%, a range which is the highest since January 2008.
Many other countries are moving along with the US to raise borrowing costs, as they grapple with their own inflation problems.
In the UK, the Bank of England started raising rates last year but has so far opted for smaller hikes than the Fed. The Bank of England is expected to announce its own 0.75 percentage point hike on Thursday – the biggest such move since 1989.
The sharp rise in borrowing costs has already started to cool some parts of the economy, such as housing.
But economists say more economic slowdown is necessary if inflation is to return to the 2% level considered healthy.
“There is always the hope of painless, immaculate disinflation,” said economist Willem Buiter, a former member of the Monetary Policy Committee of the Bank of England who is now an independent economic advisor. “Unfortunately there are very few historical episodes that fit that picture”.
“This is not going to be a pleasant year,” he added.
The Fed has been raising interest rates since March, steering borrowing costs higher at the fastest pace in decades.
Federal Reserve chairman Jerome Powell warned that rates were likely to move up again.
“We still have some ways to go and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected,” he said at a press conference following the announcement.
“We will stay the course until the job is done,” Mr Powell added.
Inflation – the rate at which prices rise – hit 8.2% in the US last month, continuing to fall after reaching 9.1% in June – the highest rate since 1981.
A decline in energy prices has helped ease the pressures, but the cost of groceries, medical bills, and many other items is still rising.