Bank of England raises rates to 2.25% despite possible recession
The Bank of England on Thursday raised its key interest rate to 2.25% from 1.75% and said it would continue to “compensate, as necessary” to respond to inflation despite the slowdown in the economy.
The BoE estimates the UK economy will shrink 0.1% in the third quarter – partly due to additional public holidays for Queen Elizabeth’s funeral – coupled with a fall in production in the second quarter that meets the definition of a technical recession .
Economists polled by Reuters last week forecast a repeat of August’s half-way hike in rates, but financial markets bet on a three-quarter-point increase, the biggest since 1989, backing sterling. Except for a brief, unsuccessful attempt in 1992 to do so.
The BoE’s move follows the US Federal Reserve’s decision on Wednesday to raise its key rate by three-quarters of a percent, as central banks across the world grapple with the impact of COVID labor shortages and Russia’s invasion of Ukraine on energy prices. Huh.
“If the outlook suggests more persistent inflationary pressures, including stronger demand, the Committee will respond as necessary,” the Bank of England said for its policy intentions, using similar words from previous months.
The BoE’s Monetary Policy Committee voted 5-4 to raise rates to 2.25%, with Deputy Governor Dave Ramsden and external MPC members Jonathan Haskell and Katherine Mann voting for a 2.5% increase, while new MPC members Swati Dhingra wanted a small growth of 2. ,
The MPC voted unanimously to reduce the BoE’s 838 billion pounds of government bond holdings to less than 80 billion pounds in the coming year, through bonds maturing and active sales, which will begin next month. This is in line with the target stated in August.
The BoE now expects inflation to be just under 11% in October, down from the 13.3% peak forecast last month, before Liz Truss won the Conservative Party leadership with promises to reduce energy tariffs and cut taxes. became the Prime Minister of Britain with
The BoE said inflation would remain above 10% for a few months after October, before falling.
Consumer price inflation fell to 9.9% in July, from a 40-year high of 10.1% in August, the first decline in nearly a year.
On Friday, new Finance Minister Kwasi Quarteng will give more details on the government’s financial plans, which could amount to more than £150 billion in stimulus.
The BoE said it would assess its implications for monetary policy at its November meeting.
However, it noted that the energy price cap would further add to the pressures, while moderating inflation in the short term.
Prior to the rate decision, financial markets expected the BoE to raise rates to 3.75% by the end of the year, with a peak of 5% reaching mid-2023. Less than a year ago, BoE rates were at a record-low 0.1%.
After Wednesday’s Fed decision, sterling fell to its lowest level since 1985 against the US dollar, although it has outperformed against the euro.