August 10, 2022
Bank of England hikes interest rates by 0.5 percent

Britain is facing a protracted recession and the worst pressure on living standards in more than 60 years, the Bank of England warned on Thursday, as it sharply raised interest rates and forecast Projected that inflation would reach 13 percent by the end of the year.

Eight of the nine members of the monetary policy committee voted to raise interest rates by 0.5 percentage points to 1.75 per cent, the highest level since the global financial crisis.

It follows aggressive moves by the European Central Bank and the US Federal Reserve in the face of rising inflation. Silvana Tenrero, an outside member, voted for a marginal increase of 0.25 percentage points against the majority.

The BoE said that because of the latest jump in gas prices, it now expects year-end inflation to exceed 13 percent – much higher than May’s forecast – and at “very high levels” throughout 2023 before falling expected to remain. Back to the target of 2 percent in two years’ time.

The pound fell 0.4 per cent to $1.209 after the news, while the yield on UK 10-year government bonds fell 0.07 per cent to 1.85 per cent.

The BoE said a nearly double increase in wholesale gas prices since May could push the normal annual household fuel bill from £2,000 to around £3,500, when prices rise in October.

With wages rising at nearly half the rate of inflation, its forecasts showed that households’ post-tax income will decline in real terms in both 2022 and 2023, even after factoring in the fiscal support announced by the government in May . With data as far back as the 1960s, a peak of more than a 5 percent drop in household income would be the worst on record.

Line chart of the Bank of England policy rate (%), showing UK interest rates rising by half a point for the first time in 27 years

Even with households dwindling their savings, consumer spending was set to fall next year, the BoE said, dragging down economic growth. Its forecasts showed a much deeper contraction in GDP than the May forecast, with the economy entering recession in the fourth quarter of 2022 and shrinking for five consecutive quarters.

GDP declines to a trough of 2.1 percent compared to those seen in the early 1990s and the BoE said that even once the economy came out of recession, growth was expected to be “very weak by historical standards”. .

The aggressive tightening of the BoE’s monetary policy will put immediate pressure on household income, but the central bank said it could not hold off on an adjustment due to major global shocks.

The MPC said it was acting in the event that domestic price pressures due to a prolonged period of high inflation due to global factors became “more permanent”, reiterating its previous guidance that it would “act coercively if necessary”. “. However, it also underlined that the policy was “not on a predetermined path”, suggesting that the 50 basis point rate hike was not necessarily the first of many.

The BoE’s central forecast, based on market expectations of a 3 percent increase in interest rates next year, showed inflation still in double digits in the third quarter of 2023, but back to the central bank’s 2 percent target a year later. have arrived. If the BoE does not take any further policy action, its forecasts suggest that inflation will still fall below 2 per cent by the end of 2024.

The BoE said the uncertainty around its central forecast – which assumes energy prices will follow market expectations for the next six months but then remain unchanged – was “extraordinarily large” but in alternative scenarios published by Still showed “very high near-term inflation”. A fall in GDP the following year and a significant drop in inflation thereafter”.

The BoE also plans to begin monthly sales of £875bn of assets built under its quantitative easing program from 2009 – which it intends to operate at a constant rate, so that interest rates remain its main tool for adjustment. Monetary policy.

It said it was considering tentatively to begin selling Gilt soon after the September meeting, aiming to reduce its stock by around £80bn during the first 12 months. Given the profile of gilts maturing in this period, this represents a sales schedule of approximately £10bn per quarter.

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