With inflation close to 10%, the Bank of England decided to raise interest rates by 50 basis points, the biggest rise in 27 years. Warns that the UK will enter recession at the end of the year.
The Bank of England raised interest rates by 50 basis points this Thursday, in what is the biggest increase since 1995, in an effort to contain the escalation of inflation that is expected to reach 13.3% in October. And he already left the warning: “The UK is expected to enter recession in the fourth quarter of this year.”
With this decision, which was widely expected by investors, the BoE (acronym for Bank of England) raises the key rate to 1.75%, the highest level since the end of 2008, at the beginning of the global financial crisis. Eight of the nine members of the BoE’s monetary policy committee voted in favor of raising rates by 50 basis points, with only one member wanting a rise of just 25 basis points.
At the same time, the central bank led by Andrew Bailey warned that the United Kingdom is likely to slide into recession with a loss of 2.1% of Gross Domestic Product (GDP), a fall of the same magnitude as that recorded in the 1990s but much far from the contractions seen in the pandemic or the global financial crisis of 2008.
The British economy is expected to start to contract in the last three months of the year and throughout 2023, thus anticipating the longest recession after the financial crisis.
Inflation in the UK soared to 9.4% and, despite the monetary tightening, is expected to reach 13.3% in October, according to central bank estimates, due to pressure from energy prices. The Resolution Foundation think tank expects the inflation rate to climb to 15% early next year, given the impact of Russia’s invasion of Ukraine and disruptions in global value chains after the pandemic.
In a press conference, Andrew Bailey justified the decision with the fact that he had “some indications that price pressures are becoming more persistent and widespread” and reiterated the bank’s unwavering commitment to bring inflation down to 2%. “Returning to the 2% target remains our absolute priority. There are no ifs or buts about it,” he told reporters.
On the other hand, he also considered that “faster tightening now reduces the risk of a more prolonged and costly cycle of increases later on” and that if inflation does not return to the target “things will get worse”, especially for those with lower incomes.
The governor also underlined that all options remain on the table at the bank’s next meetings and that there is no “predetermined” path in interest rate hikes. “The magnitude, pace, and timing of further changes in the bank’s rate will reflect the committee’s assessment of the economic outlook and inflationary pressures”, says the BoE.
To stop the uncontrolled rise in prices, and already counting on Thursday’s decision, the BoE has already raised rates six times since December. In June, the central bank promised that it would act strongly if inflationary pressures persist.
In recent weeks, the US Federal Reserve and the European Central Bank (ECB) have also increased their reference rates to bring inflation back within the 2% objective.
Source: With Agencies