EconomyBreaking News: Bank of England raises interest rate by...

Breaking News: Bank of England raises interest rate by 50 basis points

The Bank of England on Thursday made the biggest interest rate hike in 27 years, despite warning of a long recession looming, as it scrambles to stifle a surge in inflation already above 13%.

The Monetary Policy Committee of the Bank of England voted by 8 votes in favor and 1 against to introduce a half percentage point rise in the bank interest rate, from 1.25% to 1.75% – its highest level since the end of 2008 -.

Most economists in a Reuters poll expected the 50 basis point rise, as central banks around the world struggle to contain rising prices.

Governor Andrew Bailey said all options were on the table for the next BoE meeting in September, and beyond.

“Getting inflation back to the 2% target remains our top priority. There are no buts about it,” he told a news conference.

The dire economic outlook comes at a time of heightened political turmoil in Britain, with Prime Minister Boris Johnson forced to resign, setting off a long race to replace him that has divided the ruling party.

The favorite to win, Foreign Secretary Liz Truss, has promised big tax cuts and a review of the Bank of England’s mandate.

Bailey said he has “enormous sympathy” for struggling households who feel rising interest rates will make their lives harder.

“I’m afraid the alternative is even worse, in terms of persistent inflation,” he said.

Silvana Tenreyro, a member of the Monetary Policy Committee, voted alone in favor of a smaller increase of 25 basis points.

The Bank of England warned that the United Kingdom was facing a recession with a cumulative fall in GDP of 2.1%, similar to the fall in the 1990s, but less than the impact of Covid-19 and the slowdown caused by the financial crisis. 2008-2009 World Cup.

The economy would begin to contract in the last quarter of 2022 and would contract throughout all of 2023, making it the longest recession since after the global financial crisis.

Consumer price inflation could peak at 13.3% in October, the highest level since 1980, mainly due to rising energy prices following the Russian invasion of Ukraine.

This scenario leaves households facing two consecutive years of declining disposable income, the biggest cut since records began in 1964.

“Waves of headline inflation continue to hit the UK hard,” said Brian Coulton, chief economist at Fitch Ratings. “This probably won’t be the last 50 basis point move.”

Sterling fell against the US dollar as futures forecast a further 25 basis point hike in interest rates to 2% for the next Bank of England meeting in September.

UK consumer price inflation reached its highest level in 40 years at 9.4% in June, more than four times the 2% target set by the central bank, triggering strikes and putting pressure on Boris Johnson’s eventual successor as the next British prime minister to offer more aid.

Truss, the favourite, said the Bank of England forecasts underlined the need for an emergency budget and tax cuts. His rival, former Finance Minister Rishi Sunak, said controlling inflation was imperative for any future government.

The BoE had previously forecast inflation to peak above 11% and the British economy to grow almost nowhere before 2025.

In its new forecasts, the BoE predicts that inflation will fall back to 2% within two years, as the impact of the economy takes its toll on demand.

Bailey said the risks to the BoE’s outlook were “exceptionally large”.

There is no set course

The British central bank has raised interest rates six times since December, but Thursday’s move was the biggest since 1995.

Pressure on Governor Andrew Bailey and his colleagues to act with broader measures has intensified following recent large hikes by the US Federal Reserve (Fed), the European Central Bank (ECB) and other central banks.

These movements weakened the value of the pound, which can increase inflation.

The Bank of England repeated that it was prepared to act decisively if necessary to curb the most persistent inflationary pressures.

However, he stressed that there are “extremely large” uncertainties about the economy — which could make the slowdown more or less severe than his central forecasts — and that he will judge what his next moves should be as events unfold.

“Monetary policy is not on a set course,” the Bank of England said. “The scale, pace and timing of any further changes in bank interest rates will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”

The Bank of England said it plans to start selling its huge stockpile of government bonds, with active sales of around £10bn a quarter, shortly after its next meeting in mid-September, with active sales of around £10bn. to quarter.

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