The Sunday Mail
The Bank of England raised interest rates by the most in 27 years on Thursday, 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 percent.
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 percent – its highest level since late 2008 – from 1.25 percent.
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 percent, 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 percent 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 percent in June, already more than four times the BoE’s 2 percent 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 percent 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 percent 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. – Reuters
