The Bank of England raised interest rates to the biggest hike in 27 years on Thursday in a bid to stifle soaring inflation to 13%, even as it warned a long recession was announced.
Reeling from a spike in energy prices after Russia invaded Ukraine, Bank of England rate regulators voted 8-1 for a half-point hike. discount rate percentage at 1.75%.
The big rise was expected by most economists in a Reuters poll as central banks around the world scramble to contain soaring prices.
The pound fell as the Bank of England said Britain would enter recession at the end of 2022 and not emerge until early 2024.
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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.”
As well as soaring energy costs, Britain is also adjusting to Brexit and a change in political leadership.
The Bank said Britain was facing its biggest drop in living standards since records began in the 1960s.
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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.
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 Bank’s own surveys showed that inflationary pressure was mounting 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 drive rates higher.
Truss also wants to review the Bank of England’s inflation-fighting mandate.
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Bailey declined to comment on the Downing Street race or criticism of the Bank by Truss and his supporters. But he noted that UK inflation had averaged around 2% in the 25 years since the Bank gained operational independence, “not the case for all central banks, certainly”.
Truss responded to the Bank’s bleak outlook by saying she would immediately announce an emergency tax and spending plan if she becomes prime minister.
Economic shocks to come “thick and fast”
The Bank of England said Britain faces a recession with output falling 2.1% from peak to trough, similar to a 1990s slump 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.
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The Bank 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 Ukraine by Russia.
“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.”
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Citi analysts, meanwhile, predicted two more rate hikes of 25 basis points and then a cut within a year.
Investors had anticipated a 25 basis point hike in interest rates at the Bank’s next meeting in September.
The Bank also expects inflation to fall sharply over the next two to three years as the recession undermines demand.
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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 Bank’s Monetary Policy Committee has reiterated that it stands ready to act forcefully if necessary, but will assess its next steps as events unfold.
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