The Bank of England has hiked interest rates the most since 1995 and warned of a long recession


The Bank of England has launched its biggest rate hike in 27 years as it warned the UK is headed for more than a year of recession under the weight of rising inflation.

The half-point hike to 1.75 percent was backed by eight of the bank’s nine policymakers, who also lived up to their promise to act vigorously again if necessary in the future and potentially put similar increases on the table for upcoming meetings.

The move came as officials predicted a UK recession would start in the fourth quarter and last into next year. This is the longest slump since the financial crisis. Officials expect the economy as a whole to contract by about 2.1 percent.

The BOE also raised its forecast for peak inflation to 13.3 percent in October amid a surge in gas prices and warned price gains will remain high into 2023. This will exacerbate a cost-of-living crisis that will result in a sharper fall in real disposable income at any time around 60 years from now.

Even after billions of pounds in government support for struggling households, families are expected to be about 5 per cent worse off by the end of 2023, with incomes falling both this year and next.

Contrasting with the bleak outlook, the half-point hike, unprecedented since the BOE gained independence in 1997, is a sign officials are ushering in the easy-money era and scrambling to weather a wave of global tightening to keep up with their international competitors.

The projections, based on a 75% rise in average energy bills to around £3,500 in October, also highlight the magnitude of the challenge that awaits the winner of the race to succeed Boris Johnson as British Prime Minister.

Inflationary pressures have “increased significantly,” the BOE said. “The recent increase in gas prices has resulted in a further significant deterioration in the outlook for UK activity.”

Alongside the decision, the BOE also laid out its plans to unwind the huge holdings of government bonds it had amassed during the crisis.

Active sales, the first to be conducted by a major central bank, are expected to start after a confirmatory vote in September and will total around £10bn per quarter. Including redemptions, the BOE expects its holding of gilts to fall by around £80bn in the first year of the programme. Officials said there would be a “high bar” to change the plan.

Selling of the far smaller stock of corporate bonds will begin in the week beginning Sept. 19, the BOE said.

Taken together, these moves represent a significant step forward in the BOE’s fight against inflation.

While the UK central bank became the first major central bank to hike rates post-pandemic and has moved at every meeting since December, it has stuck to smaller, more usual moves so far. This has threatened to fall behind the curve as around 70 other central banks are up half a point or more this year.

The Federal Reserve has hiked rates by 75 basis points in its last two meetings, while even the European Central Bank opened its cycle with a half-point hike in July.

The BOE projections, based on a market path for interest rates peaking at 3 percent next year, show the economy will contract by about 1.25 percent in 2023 and another 0.25 percent the following year. Meanwhile, unemployment will rise to 6.3 percent by 2025.

Inflation will peak above 13 percent later this year and will still be at 9.5 percent in the third quarter of 2023. After that, it will quickly fall towards the 2% target as the recession saps demand.

The decision sparks an increasingly acrimonious debate over who is to blame for the growing cost-of-living crisis.

The BOE has been accused in some quarters of acting too slowly amid rising inflationary threats, and Liz Truss, who favors the Johnson race for prime minister, has vowed to strengthen the BOE’s mandate if she takes power.

The struggle for leadership has also complicated the task of economic forecasting. The last two candidates have very different views on tax cuts and borrowing levels, with frontrunner Liz Truss advocating the more radical path.

Typically, the BOE bases its forecasts on announced government policies, so the forecasts do not take into account anything put forward during the campaign.

With inflation rising, the vote on interest rates was stronger than expected, with most economists expecting the nine-member monetary policy committee to vote 7-2 for a 50 basis point hike.

Only Silvana Tenreyro supported a smaller move, saying rates may already have reached levels consistent with inflation returning to target and concerns about depressed household incomes.

Minutes of the meeting showed that officials had pledged to “forcibly” change interest rates in the future if necessary – language that paved the way for the half-point hike this month. Policymakers also added that “policy was not on a preset path.”

The BOE also said it plans to sell gilts from its holdings evenly across “buckets” of short, medium and long-dated gilts and does not plan a same-day gilt sale operation as an operation by the UK Debt Management Office.

The BOE will also introduce a new short-term repo facility designed to keep short-term market rates close to the BOE’s policy rate as this reduces the size of its balance sheet. The Bank of England has hiked interest rates the most since 1995 and warned of a long recession

Fry Electronics Team

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