The BoE expects GDP to grow by 0.5 per cent this year, unchanged from its last forecast, but downgraded its outlook for 2024 from 0.5 per cent to 0 per cent…reports Asian Lite News
The Bank of England (BoE) on Thursday left its key interest rate untouched at 5.25 per cent, a day after the US Federal Reserve took the step to pause further hikes as global inflation eases.
However, the interest rate in the UK still remains the highest in more than 15 years, with the country reeling from the highest rate of inflation among the G7 advanced nations.
BoE Governor Andrew Bailey said it was “much too early” to think about cutting rates.
“We’ve held rates unchanged this month, but we’ll be watching closely to see if further rate increases are needed,” Bailey said in a statement.
The BoE expects GDP to grow by 0.5 per cent this year, unchanged from its last forecast, but downgraded its outlook for 2024 from 0.5 per cent to 0 per cent.
Holding the rate at 5.25 per cent will be positive news for homeowners as when the rates go up, the cost of borrowing increases.
The pause in the US Fed Reserve interest rate hike and now the BoE following in the same footsteps is expected to have a positive impact on the Indian stock markets and the rupee as foreign funds are less likely to exit.
The US Fed kept the benchmark lending rate between 5.25 per cent and 5.50 per cent.
The European Central Bank last week left Eurozone interest rates unchanged after raising them in each of its previous 10 meetings.
Inflation in the UK peaked at 11.1 per cent in October 2022, stoked by rising oil prices after the Ukraine war but has come down to 6.7 per cent since then.
As per details, the interest rate was raised by a quarter-percentage point to 5.25 percent, which is the central bank’s 14th hike in a row…reports Asian Lite News
To bring down the high inflation, the Bank of England on 3 August increased its main interest rate to a 15-year high.
As per details, the interest rate was raised by a quarter-percentage point to 5.25 percent, which is the central bank’s 14th hike in a row.
Meanwhile, BoE Governor Andrew Bailey said, as reported by news agency Reuters, that the British central bank may have to increase borrowing costs.
“We now need to make sure that inflation gets back to the 2% target and stays there,” Bailey said in a video clip published by the BoE. “Depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain,” Reuters quoted Bailey as saying.
Amid the inflation four times the bank’s 2 percent target, economists say the interest rate outlook will depend largely on how fast inflation comes down.
The BoE said inflation is expected to drop to 4.9% by the end of 2023, with food price rises set to moderate.
“Inflation is falling, and that’s good news,” Governor Andrew Bailey said. “We know that inflation hits the least well-off the hardest, and we need to make sure that it falls back to the 2 percent target,” he added.
“I don’t think it’s time to declare that it’s all over and sticking where we are for the moment. We have to remain evidence-driven,” Bailey told reporters.
Last week, both US Federal Reserve and the European Central Bank raised rates.
Not only the US and ECB, but central banks across the globe have been raising borrowing costs to combat inflation that has been unleashed by higher energy prices following the Russian invasion of Ukraine and supply chain backups as the global economy recovered from the coronavirus pandemic.
Higher interest rates dampen inflation as it makes it more expensive for consumers and businesses to borrow to buy homes, cars, or equipment.
However, “depending on what the evidence on the economy indicates, we might need to raise interest rates again but that’s not certain,” central bank governor Andrew Bailey said in a video posted to Twitter on Thursday.
Before Thursday’s hike, financial markets were predicting the Bank of England’s benchmark interest rate would peak at 5.75% by the end of the year as the central bank tries to rein in rising prices.
Kallum Pickering, senior economist at Berenberg, wrote in a note Tuesday that “probably less than half” of previous rate hikes “has passed through into the real economy so far.
“The UK thus faces many more months of de facto policy tightening to come even after policymakers stop raising the bank rate,” he added.
Inflation in the UK is still stubbornly high despite having eased back in recent months. Consumer price inflation was 7.9% in June, down from its 41-year high of 11% in October 2022, but still the highest level among the Group of Seven rich nations, and well above the Bank of England’s target rate of 2%.
Core inflation — which strips out volatile food and energy costs — also dropped to 6.9% last month from 7.1% in May, which was its highest rate in 31 years.
Bailey told reporters Thursday that the “evidence is now clear” that tighter monetary policy had helped bring inflation down, and that he expected the rate of price rises to “continue to fall over the coming months.”
The central bank now forecasts that inflation will fall to 4.9% in the last quarter of this year, in line with UK Prime Minister Rishi Sunak’s promise to voters back in January to halve inflation to around 5%.
A fall in energy prices has driven the declines, Bailey said, but it will take time for the falling cost of fuel and gas to be fully reflected in consumer price inflation data.
The central bank also said in a report, published Thursday, that annual wage growth had come in “materially above” its expectations, rising by an average rate of 7.7% in the three months to May.
Excluding volatility in wages during the pandemic, that was the highest rate since the central bank started collecting wage growth data back in 2001.
Interest rates in the UK and most developed economies have been at or close to record lows ever since the global financial crisis of 2008.
Most central banks slashed rates, often all the way to zero, in response to the economic upheaval, trying to spur a recovery and a return of modest levels of inflation. As this process proved extremely slow, the rates stayed in previously uncharted territory for years.
However, a combination of the aftermath of the COVID pandemic and Russia’s invasion of Ukraine caused a rapid rise in inflation that began in late 2021 and carried forward into the middle of 2022 — forcing a number of central banks to raise their rates again.
Most, including the UK’s, now sit roughly where they did prior to the 2008 financial crisis.
The size of the bank’s 13th hike in a row was a surprise after most economists had predicted a smaller quarter-point increase…reports Asian Lite News
Fears that the British economy is heading for recession have mounted sharply after the Bank of England raised borrowing costs by more than anticipated, seeking to combat stubbornly high inflation with a hike that will hit borrowers hard, particularly homeowners who have to refinance in the coming months.
On a busy day for central bank action in Europe, the Bank of England said on Thursday that its nine-member Monetary Policy Committee decided to lift its main interest rate by half a percentage point to a new 15-year high of 5 percent. All but two members of the panel backed the half-point increase.
The size of the bank’s 13th hike in a row was a surprise after most economists had predicted a smaller quarter-point increase. Some even called it a panic move, given that there had been hopes as recently as last month that the bank would pause its rate-hiking cycle.
Financial markets are pricing in a potential rate peak of 6 percent, a level not hit since early 2000, after Governor Andrew Bailey warned of further increases if inflation fails to show clear signs of slowing.
“We are committed to returning inflation to the 2 percent target and will make the decisions necessary to achieve that,” he said.
Clearly, the bank has been spooked by inflation failing to ease as fast as predicted from October’s peak of 11.1 percent. Figures on Wednesday showed UK inflation unexpectedly holding steady at 8.7 percent.
Inflation has proven stickier in the UK than in other major economies with many blaming the bank’s slow start at raising borrowing rates and Britain’s departure from the European Union, which has added to import costs.
With wages rising fast, it is increasingly clear that high inflation has become embedded in the economy.
“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them,” Bailey said. “But if we don’t raise rates now, it could be worse later.”
Across Europe, other central banks also decided to push up borrowing costs on Thursday, including the Swiss National Bank with a quarter-point hike and Norway with a half-point increase. Turkey nearly doubled its benchmark rate in a signal of a shift from unorthodox economic policies.
Banks around the world, from the US Federal Reserve to the European Central Bank, have rapidly raised interest rates over the past couple of years to bring down inflation first stoked by supply chain backups tied to the rebound from the pandemic and then Russia’s invasion of Ukraine, which caused energy and food costs to surge.
The Fed decided last week to keep rates unchanged but indicated the possibility of more hikes this year.
Higher interest rates help lower inflation by making it more expensive for individuals and businesses to borrow, meaning they potentially spend less, reducing demand and pressure on prices.
The UK rate hike will pile further pressure on borrowers, particularly the 1.4 million or so households that will have to refinance their mortgages over the rest of the year. Those on variable mortgages, which track the bank’s base rate, will face an imminent increase in their repayments. Renters, too, are facing increases.
“The rise in interest rates to 5 percent will push millions of households with mortgages towards the brink of insolvency,” warned Max Mosley, an economist at the National Institute for Economic and Social Research.
The increases will clearly come at a cost, and there are concerns over the outlook for the British economy, which has so far avoided falling into recession even as Europe’s economy contracted slightly in the six months ending in March.
“It is increasingly difficult to see how the UK avoids a recession as part of the process of bringing inflation down,” said Luke Bartholomew, senior economist at asset management firm Abrdn. “And today’s large rate increase will probably be seen in retrospect as an important milestone towards that recession.”
In a recession, unemployment would inevitably increase, and home repossessions would become more prevalent — hardly the backdrop the Conservative government wants ahead of a likely general election next year. It is trailing the main opposition Labour Party in the polls.
Prime Minister Rishi Sunak, who has made halving inflation this year to about 5 percent his main priority, said he understood the “anxiety” people are feeling.
“I’m here to tell you that I am totally, 100 percent on it, and it’s going to be OK, and we are going to get through this,” he told workers at a warehouse in Dartford, just east of London.
Not everyone is convinced the bank is doing the right thing, arguing that previous interest rate increases have yet to work their way through the economy. There’s always a lag.
“Pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes,” said Paul Nowak, general secretary of the umbrella Trades Union Congress.
The Bank of England in London, Britain. (Photo by Ray Tang/Xinhua)
These areas of persistence, he continued, include domestic wage growth and price setting…reports Asian Lite News
After more than a year of warnings, Bank of England Governor Andrew Bailey says the U.K. is now experiencing a wage-price spiral despite 12 consecutive central bank interest rate hikes.
“Some of the strength in core inflation [in the U.K.] reflects the indirect effects of higher energy prices,” Bailey said in a Wednesday speech. “But it also reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy.”
“As headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.”
These areas of persistence, he continued, include domestic wage growth and price setting.
This situation risks a wage-price spiral — a theory that says that workers bargain for wage increase as inflation rises, fueling higher demand and pushing companies to raise prices to compensate for steeper expenses. This in turn leaves workers requiring higher wages to afford goods and services — perpetuating so-called “second-round effects.”
The U.K. inflation rate surprised economists by holding above 10% in March. Core inflation, excluding food, energy, alcohol and tobacco, was steady on the previous month at 5.7%.
Bailey said that the loosening of the labor market, as vacancies begin to fall, is happening more slowly than the central bank previously anticipated.
He noted that nominal wage growth — not adjusted for inflation — and services price inflation had occurred in line with the bank’s forecasts. The Bank of England sees signs of a slowdown in wage growth, but observes that services inflation remains elevated, Bailey added.
The bank’s monetary policy committee “continues to judge that the risks to inflation are skewed significantly to the upside,” he said, and would keep adjusting its main bank rate “as necessary” to reach its 2% inflation target.
Bailey incurred backlash in February last year, when he said that businesses should show “restraint” in pay negotiations, and that “broadly” workers should not ask for big pay rises. His comments were at the time slammed as out of touch, as the public faced a growing cost-of-living crisis, with inflation creating sharp falls in wage growth in real terms.
Economists and policymakers in the EU and U.S. have said in recent months that they no longer see significant risks of a wage-price spiral in those economies, with salaries having room to rise to catch up with inflation and historic stagnation.
Many also say there are signs that companies have been raising prices above their input price inflation, which has protected corporate profit margins.
Alberto Gallo, chief investment officer at Andromeda Capital Management, previously told CNBC that the U.K. was the developed economy most at risk from a wage-price spiral because of factors including weakness in the British pound, reliance on food and energy imports and a tight labor market constrained by post-Brexit rules.
Huw Pill, Bank of England chief economist, sparked a similar furore last month, when he said on a podcast that there was a reluctance in Britain to accept that “we’re all worse off, we all have to take our share,” and that workers and companies needed to stop passing price rises on to each other.
“If what you’re buying has gone up a lot relative to what you’re selling, you’re going to be worse off,” Pill said.
“So somehow in the U.K., someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing energy costs through on to customers.”
Addressing the backlash, Pill said in comments quoted by Reuters earlier this week that he would “probably use somewhat different words.”
Nevertheless, he continued, “I appreciate this is a little bit of a tough message, but … having to pay more for what we’re buying from the rest of the world relative to what we’re selling to the world is a squeeze on our spending power.”
The Bank of England in London, Britain. (Photo by Ray Tang/Xinhua)
The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008…reports Asian Lite News
The Bank of England hiked interest rates by a quarter of a percentage point Thursday, extending its long-running fight to rein in prices after a surprise increase in inflation in February.
The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008. Like other major central banks, it has pushed ahead with raising rates despite recent turmoil in the banking sector.
The Bank of England said in a statement that since its last meeting in February, inflation “had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than expected previously.”
Employment growth had also been more robust than anticipated and household disposable income was now expected to remain flat in the near term — rather than falling significantly — after the government extended its support for energy bills, the bank added.
It said that it would raise rates further “if there were to be evidence of more persistent [price] pressures.”
UK consumer prices surged by 10.4% in February compared with a year ago, the first rise in inflation in four months, as food prices soared and the cost of visiting restaurants and hotels increased. The Office for National Statistics noted particular price rises for some salad and vegetable items, partly caused by shortages, which led to rationing by supermarkets.
In a letter Thursday to finance minister Jeremy Hunt, Bank of England governor Andrew Bailey said inflation had “increasingly been driven also by factors that are more domestic,” in particular labor shortages.
However, wage growth, which remains below inflation, was expected to fall back “more quickly” than projected in February, Bailey added.
The Office for Budget Responsibility, the government’s fiscal watchdog, expects inflation to fall rapidly, reaching around 3% in the final quarter of this year, helped by falling energy prices and further easing of supply bottlenecks. The Bank of England targets an inflation rate of 2%.
The turmoil in the banking sector has increased uncertainty over the inflation outlook, because banks are now widely expected to tighten lending criteria, which would weigh on consumer demand and business investment, and so alleviate price pressures.
The Bank of England said it would “continue to monitor closely” any effects from the banking crisis on credit conditions faced by households and firms. It added that the UK banking system “remains resilient.”
The Bank of England’s job is made even more complicated by the fact that the UK economy is expected to shrink this year.
People out and about in the rain along the market area on Watney Street in Shadwell on 8th March 2023 in London, United Kingdom.
The British Chambers of Commerce said Thursday’s hike, while necessary to fight inflation, would pile further pressure on small businesses, which are facing a double-whammy from rising prices and rising borrowing costs.
“The only way out of this vicious cycle is through taking action to boost economic growth, through investment in infrastructure, skills, and global trade,” said David Bharier, head of research at the business group.
Some economists said the central bank might even be mulling rate cuts by the end of the year.
“With a flagging economy and lower energy costs still set to drive a significant fall in inflation this year, despite February’s surprise increase, the case for cutting interest rates is only likely to grow,” commented Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
The Bank of England has now raised interest rates at each of its rate-setting meetings since December 2021.
The European Central Bank, the US Federal Reserve and the Swiss National Bank have also raised interest rates in the past week.
Luke Bartholomew, senior economist at the U.K.-based fund manager abrdn, said he expects Thursday’s move to be the last rate increase of this cycle because the impact of past hikes and recent market volatility will begin to slow economic growth.
“However, there is still a significant risk of one final rate increase if inflation proves to be a bit stickier in coming months,” he said.
The Bank of England will have to make that decision in an even more complex environment than other central bankers.
A high level of dependence on natural gas and limited storage capacity left British energy users particularly exposed to the surge in global gas prices following Russia’s invasion of Ukraine. Britain also is still adjusting to the impact of leaving the European Union, which reduced trade with its neighbors, curtailed the supply of cheap labor and slowed economic growth.
Treasury chief Jeremy Hunt applauded the central bank’s decision.
“With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone,” he said.
Newly appointed UK Chancellor of the Exchequer Jeremy Hunt leaves 10 Downing Street in London, Britain, on Oct. 14, 2022. Xinhua/Li Ying/IANS)
Unlike cryptoassets and stablecoins, the digital pound would be issued by the Bank of England and not the private sector. We are separately already legislating to protect Access to Cash…reports Asian Lite News
The Bank of England will now take forward further research and development work and the public are being invited to give their views on the scheme to be taken forward.
The consultation is being launched because both HM Treasury and the Bank want to ensure the public have access to safe money that is convenient to use as our everyday lives become more digital, while supporting private sector innovation, choice and efficiency in digital payments.
Chancellor of the Exchequer, Jeremy Hunt said, “While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that’s trusted, accessible and easy to use. That’s why we want to investigate what is possible first, whilst always making sure we protect financial stability.”
Governor of the Bank of England, Andrew Bailey, said, “As the world around us and the way we pay for things becomes more digitalised, the case for a digital pound in the future continues to grow. A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability.”
However, there are a number of implications which our technical work will need to carefully consider. This consultation and the further work the Bank will now do will be the foundation for what would be a profound decision for the country on the way we use money.
Unlike cryptoassets and stablecoins, the digital pound would be issued by the Bank of England and not the private sector. We are separately already legislating to protect Access to Cash.
This means that it will have intrinsic value and not be volatile, unlike unbacked cryptoassets as there would be a central authority to back it.
The needs of vulnerable people are being considered in the digital pound design process ensuring that it would be simple and straightforward to use and understood and trusted by the public as a form of money.
A decision about whether to implement a digital pound will be taken around the middle of the decade and will largely be based on future developments in money and payments. The earliest stage at which the digital pound could be launched would be the second half of the decade.
The Bank of England in London, Britain. (Photo by Ray Tang/Xinhua)
This would be the BoE’s tenth interest rate rise in a row, since it started tightening policy in December 2021, adding to the pressure on homeowners…reports Asian Lite News
The Bank of England (BoE) is expected to increase interest rates for the tenth consecutive time this Thursday in another blow to mortgage holders.
Markets expect a 0.5 percentage point increase in the central bank’s base rate to 4%, its highest level since the 2008 financial crisis.
“As wage growth and core inflation have continued to surprise to the upside, we expect another +50bp [basis point] hike on Thursday, in line with market pricing,” Peder Beck-Friis, portfolio manager at PIMCO, said.
This would be the BoE’s tenth interest rate rise in a row, since it started tightening policy in December 2021, adding to the pressure on homeowners.
Matthew Ryan, head of market strategy at Ebury, predicts a 50bp hike due to a lack of clear evidence of a downward trend in inflation.
“Since the December meeting, we think that macroeconomic news out of the UK has mixed ramifications for monetary policy though, on balance, we are pencilling in another 50bp rate increase this week,” he said.
“The focus among committee members clearly remains on inflation and, as of yet, we are yet to clear evidence of a downward trend in either the headline or core CPI measures.”
Forecasting group The EY Item Club predicts that the BoE will deliver better economic news along with the 50bp rise.
“A significant fall in gas prices, lower market interest rate expectations and an economy less weak than expected should cause the Bank of England to dial back on the downbeat economic outlook of its last forecast when it presents new projections on Thursday,” it said.
“Stubborn core inflation and strong pay growth mean another 50 basis points rise in bank rate is likely. But the EY ITEM Club thinks this increase could prove the end of the current rate-rising cycle.”
Deutsche Bank’s (DB) senior economist Sanja Ray also sees interest rates hitting 4% this Thursday.
“Will they meet market pricing of 50bp, or surprise and downshift to 25bp? Our long-standing view has been that the MPC will deliver one more 50bp hike in February before downshifting to more ‘normal’ sized hikes in March and May, taking bank rate to a peak of 4.5%,” he said.
The half a percentage point hike by the BoE would raise interest rates to their highest levels since autumn 2008 when Lehman Brothers filed for bankruptcy and kickstarted the great financial crisis.
The level of the increase, however, is still shrouded in some level of uncertainty as some traders recall the lack of unanimity in the last meeting.
“As for the BoE, a 0.5% rise to 4.0% also looks likely although is rather less certain given the marked disagreement at the last MPC [Monetary Policy Committee] meeting on whether to raise rates or leave them unchanged,” Rupert Thompson, chief economist at Kingswood, cautioned.
The MPC split three ways in December, with two members – Silvana Tenreyro and Swati Dhingra – voting to end rate increases, while Catherine Mann backed a larger 0.75 percentage point move.
Investec Economics also expects a smaller rate hike that would take it to 3.75% on Thursday, before peaking at 4% in March.
“Recent weeks have ushered in a greater sense of economic optimism,” Philip Shaw, chief economist at Investec, said.
“This has been driven partly by the mild European winter, which has helped to avoid a need for energy rationing, contributing to a substantial fall in current spot gas prices as well as gas price futures.
Threadneedle Street is trying to walk a very fine line. It does not want to push the UK into a recession by raising borrowing costs but its mandate is to keep inflation at around 2%.
The rate of inflation eased to 10.5% but remains close to a 40-year high as UK households continue to be squeezed by the cost of living crisis. Businesses are being crushed by struggling to find affordable credit.
“Weaker growth and the large exposure of the UK economy to the housing market mean the Bank of England may be reluctant to aggressively raise rates at this time,” said Frédérique Carrier, head of investment strategy for RBC Wealth Management in the British Isles and Asia.
Pound (Wikipedia)
“The consensus peak rate of 4.4% might not be reached. Consequently, higher inflation is likely to linger for longer.”
While inflation is now falling thanks to softening energy prices, there are fears that persistent strong wage growth could still keep it well above the BoE’s 2% target.
The Bank’s former chief economist has warned that the BoE must slowdown interest rate rises to avoid undermining the UK’s recovery.
Andy Haldane told the BBC Radio 4’s Today programme last week: “I’d have preferred the Bank and other central banks to have started their rate rises a bit sooner.
“That would have helped a bit in nipping inflation in the bud and would have meant that we wouldn’t have had those rapid rate rises at the same time as the economy was hitting the buffers.”
The King’s image will appear on the front of the banknotes as well as in the see-through security window, which is included in U.K. currency for added protection against fraud…reports Asian Lite News
The design for the first set of bank notes to feature new monarch of Britain, King Charles III, was unveiled by the Bank of England here on December 20.
The 74-year-old monarch’s portrait will appear on the existing designs of all four polymer banknotes in the denominations of 5, 10, 20 and 50 pounds with no other changes to the existing designs of the notes that feature his late mother Queen Elizabeth II’s portrait.
The new notes with the King are expected to enter circulation by mid-2024 and the current notes featuring the Queen will continue to be in regular use in parallel.
“I am very proud that the Bank is releasing the design of our new banknotes which will carry a portrait of King Charles III,” said Bank of England Governor Andrew Bailey.
“This is a significant moment, as the King is only the second monarch to feature on our banknotes. People will be able to use these new notes as they start to enter circulation in 2024,” he said.
The King’s image will appear on the front of the banknotes as well as in the see-through security window, which is included in U.K. currency for added protection against fraud.
All polymer banknotes carrying a portrait of Queen Elizabeth II remain legal tender, which means they can continue to be used as normal.
In line with guidance from the U.K.’s Royal Household, to minimise the environmental and financial impact of this change, new notes will only be printed to replace worn out banknotes and to meet any overall increase in demand for banknotes, the Bank of England said.
Notes featuring Queen Elizabeth II and King Charles III will therefore co-circulate for years ahead.
Although the note designs unveiled this week will feature a new portrait of the monarch, the reverse side of each note remains unchanged.
The current set, dubbed series G, features the following famous British characters in the designs on the reverse: 5 pound– war-time Prime Minister Winston Churchill; 10 pound – Author Jane Austen; 20 pound – artist JMW Turner; and 50 pound– coder Alan Turing.
Older paper bank notes were phased out to bring in the polymer versions in recent years.
While paper bank notes are longer legal tender and cannot be used as a means of payment, they can be presented for exchange either in person at the Bank of England premises in London or sent in by post.
The Bank of England (BoE) raised interest rates by the most in 27 years on August 4, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%…reports Asian Lite News
The Bank of England warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s
The Bank of England (BoE) raised interest rates by the most in 27 years on August 4, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.
Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75%—its highest level since late 2008—from 1.25%.
The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.
MPC member Silvana Tenreyro cast a lone vote for a smaller 25-basis-point increase.
The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s but far less than the hit from COVID-19 and the downturn caused by the 2008-09 global financial crisis.
The economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis.
Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3% in October—the highest since 1980—due mostly to the surge in energy prices following Russia’s invasion of Ukraine.
That would leave households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.
British consumer price inflation hit a 40-year high of 9.4% in June, already more than four times the BoE’s 2% target, triggering industrial action and putting pressure on whoever succeeds Boris Johnson as Britain’s next prime minister to come up with further support.
The BoE had previously expected inflation to peak at above 11% and almost no growth in Britain’s economy before 2025 at the earliest.
In its new forecasts, the BoE saw inflation falling back to 2% in two years’ time as the hit to the economy took its toll on demand.
The British central bank has now raised rates six times since December but Thursday’s move was the biggest since 1995.
The pressure on Governor Andrew Bailey and colleagues to move in larger steps intensified after recent big rate hikes by the U.S. Federal Reserve, the European Central Bank and other central banks.
Those moves weakened the value of the pound, which can add to inflation.
The BoE repeated that it was ready to move forcefully if needed to stem more persistent inflationary pressures.
But it stressed that there were “extremely large” uncertainties about the economy—which could make the slowdown more or less severe than its core forecasts—and it would judge what its next moves should be as events unfold.
“Policy is not on a pre-set path,” the BoE said. “The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”
On top of everything else, the BoE’s inflation-fighting record has been called into question by Liz Truss, the front-runner to be Britain’s next Prime Minister.
She wants to set “a clear direction of travel” for monetary policy and to review the BoE’s mandate.
The BoE said it expected to start selling down its huge stockpile of government bonds, with active sales of around 10 billion pounds a quarter, shortly after its next meeting in mid-September.
The gilt holdings peaked at 875 billion pounds in December and have since fallen to 844 billion pounds after the BoE stopped reinvesting the proceeds of maturing bonds in February.
