Bank of England raises rates to highest since 1995 despite approaching recession

  • The BoE raises its discount rate by 50 basis points to 1.75%
  • Bank warns UK economy will start to contract in Q4
  • Bring inflation back to ‘top priority’ target – Bailey
  • BoE plans to start selling gilt stocks from September

Aug 4 (Reuters) – The Bank of England on Thursday raised interest rates to the highest level in 27 years in a bid to stifle soaring inflation to 13%, even as it warned that a long recession was coming.

Reeling from a spike in energy prices after Russia invaded Ukraine, BoE rate setters voted 8-1 for a half-point hike. percentage of the discount rate to 1.75%, its highest level since the end of 2008.

The big rise was expected by most economists in a Reuters poll as central banks around the world scramble to contain soaring prices.

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The pound fell as the BoE said Britain would enter recession at the end of 2022 and not emerge until early 2024.

Governor Andrew Bailey said economic uncertainty was exceptionally high and all options were open. “Getting inflation back to the 2% target remains our top priority,” he said. “There are no ifs or buts about it.” Read more

As well as soaring energy costs, Britain is also adjusting to Brexit and a change in political leadership. The BoE said Britain faces its biggest drop in living standards since records began in the 1960s.

On Wednesday, the National Institute for Economic and Social Research, a think tank, said more than a million households would soon have to choose between heating and buying enough food. Read more

Bailey said he had “enormous sympathy” for households facing rising borrowing costs, but “I fear the alternative is even worse, in terms of persistent inflation.”

Comments from business leaders and the BoE’s own surveys showed inflationary pressure in the labor market due to a severe shortage of job candidates, he said.

The favorite to become the next prime minister, Foreign Secretary Liz Truss, has promised deep tax cuts. Many economists say that would fuel inflation and push rates higher.

Truss also wants to review the BoE’s inflation-fighting mandate. Read more

Bailey declined to comment on the Downing Street race or the BoE criticism of Truss and his supporters. But he noted that UK inflation had averaged around 2% in the 25 years since the BoE gained operational independence, “this is certainly not the case for all central banks”. .

Truss responded to the BoE’s bleak outlook by saying she would immediately announce an emergency tax and spending plan if she becomes prime minister. Read more

COMING RECESSION

The BoE said Britain faces a recession with output falling 2.1% from peak to trough, similar to a recession in the 1990s but far less than the hits of COVID-19 and the global financial crisis of 2008-09.

The new forecasts were worse than recent projections by the International Monetary Fund, which said Britain will have the slowest growth and highest inflation in 2023 among the world’s major developed economies.

The BoE said consumer price inflation is now expected to peak at 13.3% in October – the highest since 1980 – mainly due to soaring energy prices following the invasion of the Ukraine by Russia.

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“Shocks to UK headline inflation keep coming fast,” said Brian Coulton, chief economist at Fitch Ratings.

“It probably won’t be the last 50 basis point move.”

Citi analysts, meanwhile, predicted two more rate hikes of 25 basis points and then a cut within a year.

Investors expected a 25 basis point hike in interest rates at the next BoE meeting in September.

The BoE also expects inflation to fall sharply in two to three years, as the recession undermines demand.

NO PREDEFINED PATH

Britain’s central bank has hiked rates six times since December. Thursday’s move was the biggest since 1995.

Pressure on Bailey and his colleagues to move forward in bigger steps intensified after sharp rate hikes by the US Federal Reserve, European Central Bank and other central banks.

The BoE’s monetary policy committee reiterated that it stands ready to act forcefully if necessary, but will assess its next steps as events unfold. “Politics is not on a predefined path,” the MPC said.

The BoE also said it planned to start selling its massive stockpile of government bonds – currently worth £844bn – soon after its September meeting, with active sales of around £10bn. books per quarter. Read more

MPC member Silvana Tenreyro voted alone on Thursday for a smaller 25 basis point increase.

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Additional reporting by Andy Bruce; Editing by Toby Chopra and Paulo Prada.

Our standards: The Thomson Reuters Trust Principles.

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