United Kingdom: Bank of England sees recession approaching and increases rate hikes
UK inflation is expected to continue to escalate to over 13% in October
It runs, it runs, inflation. The Bank of England estimates on Thursday that the country will enter a recession because of galloping inflation. In response to this observation, it announced a drastic increase in its key interest rates by half a percentage point. The BoE’s decision to raise its main rate to 1.75%, an increase of 50 basis points, the largest increase since 1995, is also likely to weigh on the economy by making borrowing more expensive.
According to the monetary policy report, British inflation is expected to continue to climb to more than 13% in October, a record since the end of 1980, after having already reached 9.4% over one year in June. Enough to complicate the task of the future Prime Minister, in the middle of the Conservatives’ campaign for the succession of Boris Johnson who sees the debates monopolized by the acute crisis of the cost of living experienced by the British.
Heavy damage to the economy
The surge in gas prices since the beginning of the Russian invasion of Ukraine has led the central bank to foresee a painful 75% increase in the ceiling on electricity prices charged to consumers in October. The damage will be heavy for the economy: “We expect a contraction in output every quarter” between the last three months of 2022 and the last three months of 2023, warns the Bank of England (BoE).
And “growth after this period will remain very weak,” she adds, with an increase of 3.5% in 2022, but a first contraction of GDP of 1.5% in 2023 and a second of 0.25% in 2024. “I have sympathy for those who are wondering why we are raising rates now and making life more difficult,” BoE Governor Andrew Bailey told a conference. “But the alternative option is worse,” he insisted.
“All options on the table”
“Our job is to prevent inflation from setting in beyond two, three years,” as it did in the 1970s, said Ben Broadbent, a member of the monetary policy committee. According to the BoE, it is better to act harder now than to see the tightening cycle of monetary policy take hold over time.
Bailey said that for the upcoming meetings, “all options will be on the table” and that the fight against inflation remains his priority. The BoE is following the example of the US Federal Reserve and the European Central Bank, which chose to raise rates by 0.75 and 0.50 percentage points respectively in July. Britain’s central bank said it would also vote in September on whether to start actively selling bonds it holds under its asset purchase program.
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