The Bank of England has warned that the UK will enter recession by the end of the year. The projected recession is expected to be the longest since the global financial crisis.
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The Bank of England voted to raise the base rate to 2.25% from 1.75% on Thursday, less than the 0.75 percentage point increase expected by many traders.
UK inflation eased slightly in August, but at 9.9% yoy it remained well above the bank’s 2% target. Energy and food have seen the biggest price increases, but core inflation, which excludes these components, is still at 6.3% yoy.
The BOE now expects inflation to peak just under 11% in October, down from a previous forecast of 13%.
But the increase came despite the bank saying it believed the UK economy was already in recession, as it expected GDP to shrink by 0.1% in the third quarter, down from a previous forecast for GDP growth. 0.4%. A decline of 0.1% in the second quarter would follow.
Numerous analysts, along with the British Chambers of Commerce business association, have previously said they expect the UK to enter a recession before the end of the year. In addition to energy price shocks, it faces commercial bottlenecks due to Covid-19 and Brexit, declining consumer sentiment and falling retail sales.
The BOE lowered its key rate, known as the bank rate, to 0.1% in March 2020 in an effort to support growth and spending at the start of the coronavirus pandemic. However, as inflation began to rise sharply towards the end of last year, it was among the first major central banks to kick off a bullish cycle at its December meeting.
This is its seventh consecutive hike and brings UK interest rates to a level last seen in 2008.
In a statement explaining its decision, the bank noted volatility in wholesale gas prices, but said announcements of government caps on energy bills would limit further increases in consumer price index inflation. However, he said there had been further signs of “continued strength of domestically generated inflation since August”.
He added: “The labor market is tense and internal cost and price pressures remain high [energy bill subsidy] reduces inflation in the short term, it also means that household spending will probably be less weak than forecast in the August report in the first two years of the forecast period “.
Five members of its monetary policy committee voted for the 0.5 percentage point increase, while three voted for a 0.75 percentage point increase higher than many expected. One member voted for a 0.25 percentage point increase.
The bank said it was not on a “predetermined path” and would continue evaluating the data to decide the magnitude, pace and timing of future bank rate changes. The committee also voted to initiate the sale of UK government bonds held in its Asset Purchase Facility shortly after the meeting and noted a “sharp rise in government bond yields globally”.
The bank’s decision comes against the backdrop of an increasingly weaker British pound, recession forecasts, a European energy crisis and a program of new economic policies to be introduced by the new Prime Minister Liz Truss.
The pound hit new multi-year lows against the dollar this week, trading below $ 1.14 through Wednesday and dipping below $ 1.13 early Thursday. It fell precipitously against the greenback this year and was the last at this level in 1985. It rose 0.2% after the BOE’s decision with a 0.5 percentage point increase at full price.
The devaluation of the pound was caused by a combination of dollar strength – as traders flock to investing perceived as a safe haven amid global market volatility and as the US Federal Reserve raises its interest rates – and gloomy forecasts for the UK economy.
Meanwhile, the country’s newly formed government unveiled several significant economic policy proposals this month ahead of a “fiscal event,” dubbed a mini budget, when they are officially announced on Friday.
This should include a reversal of the recent national insurance tax hike, tax cuts for businesses and homebuyers, and a low-tax “investment zone” plan.
Truss has repeatedly stressed the commitment to lower taxes in an effort to revive economic growth.
However, the energy crisis has also meant that the government has announced a huge spending package to curb rising bills for households and businesses.
Data released Wednesday showed that the UK government borrowed £ 11.8bn ($ 13.3bn) last month, nearly double the forecast and £ 6.5bn more than the previous month. same month of 2019, due to an increase in public spending.
The UK isn’t alone in raising interest rates to fight inflation. The European Central Bank hiked rates by 75 basis points earlier this month, while the Swiss central bank rose 75 basis points on Thursday morning. The US Federal Reserve raised its policy rate range by the same amount on Wednesday.