On Thursday, the Bank of England boosted interest rates by the greatest in 27 years, while warning that a protracted recession is on the horizon, as it hastened to smother a spike in inflation that is now expected to surpass 13%.
Reacting to an increase in energy costs caused by Russia’s invasion of Ukraine, the Bank of England’s Monetary Policy Committee voted 8-1 to raise the Bank Rate from 1.25 percent to 1.75 percent, its highest level since late 2008.
Most analysts polled by Reuters predicted the 50-basis-point rise as central banks across the globe race to curb the price spike.
Silvana Tenreyro, a member of the MPC, was the lone vote in favor of a lesser 25-basis-point increase.
The Bank of England warned that Britain was in a recession, with a 2.1 percent drop in output from peak to trough, similar to a slump in the 1990s but far less than the impact of COVID-19 and the 2008-09 global financial crisis.
The economy would begin to decline in the fourth quarter of 2022 and continue to decrease throughout 2023, making it the longest recession since the global financial crisis.
Consumer price inflation was now expected to peak at 13.3 percent in October, the highest since 1980, owing mostly to the spike in energy costs after Russia’s invasion of Ukraine.
This would result in families seeing two years of declining discretionary income, the most severe squeeze since records started in 1964.
Consumer price inflation in the United Kingdom reached a 40-year high of 9.4 percent in June, more than four times the Bank of England’s 2 percent target, sparking industrial action and putting pressure on whoever succeeds Boris Johnson as Britain’s next prime minister to provide additional support.
The Bank of England had forecasted a peak in inflation of more than 11% and essentially no growth in the British economy until 2025 at the earliest.
According to the Bank of England’s new forecasts, inflation will return to 2% in two years as the economic downturn takes its toll on demand.
The Bank of England has hiked interest rates six times since December, but Thursday’s increase was the largest since 1995.
The recent large rate hikes by the US Federal Reserve, the European Central Bank, and other central banks have increased the pressure on Governor Andrew Bailey and his colleagues to take larger steps.
These actions lowered the value of the pound, which may contribute to inflation.
The Bank of England reiterated its willingness to act decisively if necessary to combat persistent inflationary pressures.
However, it cautioned that there were “extremely large” uncertainties regarding the economy, which may cause the recession to be more or less severe than its core estimates, and that it would decide its next steps as events unfolded.
“Policy is not on a pre-set path,” the BoE said. “The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”
In addition, Liz Truss, the front-runner for Britain’s next prime minister, has questioned the Bank of England’s performance in combating inflation.
She wants to establish “a clear direction of travel” for monetary policy and to reassess the Bank of England’s mission.
The Bank of England said it expects to begin selling its massive stockpile of government bonds soon after its next meeting in mid-September, with active sales of roughly 10 billion pounds each quarter.
The gilt holdings peaked in December at 875 billion pounds, but have subsequently declined to 844 billion pounds after the Bank of England ceased reinvesting the proceeds of expiring bonds in February.