The Bank of England made this Thursday the highest increase in interest rates in 27 yearsdespite warning of a long recession looming, while rushing to quell a rise in annual inflation that could exceed 13% in the coming months.
The Monetary Policy Committee of the Bank of England voted by 8 votes in favor and 1 against to introduce a rise of half a percentage point in the bank interest rate, from 1.25% to 1.75% – its highest level since the end of 2008 -.
The majority of economists who participated in a survey of Reuters expected the 50 basis point rise, at a time when central banks around the world are struggling to contain rising prices.
Silvana Tenreyro, a member of the Monetary Policy Committee, voted alone in favor of a smaller increase of 25 basis points.
The Bank of England warned that the UK was facing a recession with a cumulative drop in GDP of 2.1%, similar to the drop in the 1990sbut far lower than the impact of COVID-19 and the slowdown caused by the global financial crisis of 2008-09.
The economy would begin to contract in the last quarter of 2022 and would contract throughout all of 2023which would make it the longest recession since after the global financial crisis.
consumer price inflation could peak at 13.3% in October, the highest level since 1980, mainly due to the rise in energy prices after the Russian invasion of Ukraine.
This scenario leaves households facing two consecutive years of decreased disposable incomethe largest cut since these records began in 1964.
UK consumer price inflation reached its highest level in 40 years in June at 9.4%, more than four times the 2% target set by the Bank of England, triggering strikes and has put pressure on Boris Johnson’s eventual successor as Britain’s next prime minister to offer more aid.
The BoE had previously forecast inflation to peak above 11% and the UK economy to grow almost nowhere near 2025 at the earliest.
In his new forecasts, the BoE expects inflation to fall back to 2% within two years, as the shock from the economy takes its toll on demand.
Britain’s central bank has raised interest rates six times since December, but Thursday’s move was the biggest since 1995.
Pressure on Governor Andrew Bailey and his colleagues to act with broader measures has intensified following recent large rate hikes by the US Federal Reserve, the European Central Bank and other central banks.
These movements weakened the value of the pound, which can increase inflation.
The Bank of England repeated that it was prepared to act decisively if necessary to curb the most persistent inflationary pressures.
However, he stressed that there are “extremely large” uncertainties about the economy — which could make the slowdown more or less severe than his central forecasts — and that he will judge what his next moves should be as events unfold.
“Monetary policy is not on a set course,” the Bank of England said. “The scale, pace and timing of any further changes in the bank interest rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”
Adding to the complex economic outlook, the BoE’s inflation-fighting record has been called into question by Liz Truss, the favorite to be Britain’s next prime minister.
Truss wants to establish “a clear direction of travel” for monetary policy and review the BoE’s mandate.
The Bank of England said it plans to start selling its huge reserve of government bonds, with active sales of about 10 billion pounds a quarter, soon after its next meeting in mid-September.
Gilt holdings peaked at £875bn in December and have since fallen to £844bn after the BoE stopped reinvesting funds from maturing bonds. february.
(With information from Reuters / By William Schomberg and David Milliken)