the Bank of England raised interest rates by three-quarters of a percentage point on Thursday, the biggest hike in 33 years, as it tries to contain runaway inflation even as the UK economy slides into a recession which could last two years.
The central bank made its eighth interest rate hike in less than a year, taking its benchmark rate to 3%, the highest since November 2008.
The great walk coincides with the movements made by the US Federal Reserve on Wednesday and the European Central Bank last week.
“Inflation is too high and it’s the bank’s job to bring it down,” Governor Andrew Bailey said at a news conference after the announcement. “If we don’t act forcefully now, it will be worse later.”
As the Bank of England raises borrowing costs to limit rising prices, the British economy is expected to suffer.
The central bank believes economic output is already contracting, and its latest projection is for the recession to continue through the first half of 2024 “as high energy prices and tighter financial conditions weigh on spending.”
Compared to previous UK recessions, gross domestic product is forecast to remain weak compared to pre-recession levels for an “extended” period, Bailey said.
A two-year recession would be longer than the one that followed the 2008 global financial crisis, although the Bank of England said any decline in GDP by 2024 was likely to be relatively small.
Sterling fell sharply after the announcement, falling 2% against the US dollar to $1,117. It also fell 1.2% against the euro.
Since the last Bank of England meeting, UK financial markets have gone through a period of unprecedented turbulence and the outlook for the economy has deteriorated.
Former Prime Minister Liz Truss’s “mini” budget at the end of September, with its promise of £45 billion ($51.6 billion) of unfunded tax cuts, crashed the poundcollapsed bond prices, caused chaos in mortgage markets and urged a emergency intervention by the Bank of England to bail out struggling pension funds.
While Truss’s tax cut plans have been largely abandonedRestoring calm to the markets and easing medium-term inflation expectations, rising food and energy costs are keeping prices high. The annual rate of inflation rose to 10.1% in September from 9.9% in August, returning to a 40-year high reached in July.
Bailey acknowledged the “difficult road ahead.”
The central bank does not believe that inflation will begin to fall until next year. That will require more interest rate hikes in the coming months, though Bailey said market expectations seemed too aggressive.
Those comments contrasted with comments on Wednesday from Fed Chairman Jerome Powell, who said rates may need to rise more than expected.
Central bank policymakers they are now awaiting the government’s budget announcement on November 17 for more details on spending plans and fiscal policies, which could influence what happens to inflation next year.
Despite the recent turmoil in the bond market, the Bank of England went ahead this week with plans to reduce its balance sheet, selling £750 million ($859 million) of short-term government bonds on Tuesday. In a sign of renewed confidence in the UK, investors placed around £2.45 billion ($2.8 billion) in bids for the bonds, Reuters reported.
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