The Bank of England has warned that the UK will enter a recession at the end of this year. The expected recession is forecast to be the longest since the global financial crisis.
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The Bank of England voted to raise its base rate to 2.25% from 1.75% on Thursday, falling short of the 0.75 percentage point increase many traders had expected.
UK inflation eased slightly in August but at 9.9% yoy remained well above the bank’s 2% target. Energy and food have experienced the largest price increases, but core inflation, which excludes these components, remains at 6.3% annually.
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The BOE lowered its key rate, known as the bank rate, to 0.1% in March 2020 in a bid to boost growth and spending at the start of the coronavirus pandemic. However, when inflation began to rise sharply late last year, it was one of the first major central banks to start a hike cycle at its December meeting.
This is their seventh consecutive hike and brings UK interest rates to a level last seen in 2008.
In a statement explaining its decision, the bank noted volatility in wholesale gas prices but said government announcements of caps on energy bills would limit further increases in consumer price index inflation. However, he said there have been more signs since August of “continued strength in domestically generated inflation.”
He added: “The labor market is tight and domestic cost and price pressures remain high. While the [energy bill subsidy] reduces short-term inflation, it also means that household spending is likely to be less weak than projected in the August Report for the first two years of the forecast period.”
Five members of his Monetary Policy Committee voted for the 0.5 percentage point increase, while three voted for a larger 0.75 percentage point increase that many expected. One member voted for a 0.25 percentage point increase.
The bank said it was not on a “pre-set path” and would continue to evaluate the data to decide the scale, pace and timing of future Bank Rate changes. The committee also voted to start the sale of UK government bonds held on its Asset Purchase Service shortly after the meeting and noted a “sharp rise in government bond yields globally”.
The bank’s decision comes against a backdrop of a weakening pound sterling, recession forecasts, the European energy crisis and a program of new economic policies to be introduced by new Prime Minister Liz Truss.
Sterling hit new multi-decade lows against the dollar this week, trading below $1.14 through Wednesday and falling below $1.13 early Thursday. It has fallen precipitously against the dollar this year and was last at this level in 1985. It was up 0.2% after the BOE decision with the 0.5 percentage point increase fully discounted.
The pound’s devaluation has been caused by a combination of strength in the dollar, as traders flock to the perceived safe-haven investment amid global market volatility and as the US Federal Reserve raises its own interest rates; and gloomy forecasts for the UK economy. .
Numerous analysts, along with the British Chambers of Commerce trade association and the BOE itself, have said they expect the UK to slip into recession before the end of the year. In addition to energy price shocks, it faces trade bottlenecks due to Covid-19 and Brexit, declining consumer confidence and falling retail sales.
Meanwhile, the country’s newly formed government has put forward numerous major economic policy proposals this month ahead of a “fiscal event,” dubbed a mini-budget, when they will be officially announced on Friday.
This is expected to include a reversal of the recent rise in the National Insurance tax, tax cuts for businesses and home buyers, and a plan for low-tax “investment zones.”
Truss has repeatedly emphasized a commitment to cut taxes in a bid to boost economic growth.
However, the energy crisis has also meant that the government has announced a huge spending package to curb skyrocketing bills for households and businesses.
Data released on Wednesday showed the UK government borrowed £11.8bn ($13.3bn) last month, nearly double what was forecast and £6.5bn more than the same month in 2019, due to a rise in spending. public.
The UK is not alone in raising interest rates to combat inflation. The European Central Bank raised rates by 75 basis points earlier this month, while Switzerland’s central bank raised 75 basis points on Thursday morning. The US Federal Reserve raised its benchmark rate range by the same amount on Wednesday.