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Bank of England predicts recession, takes measures

Friday 5 August 2022 13:26 CET | News

The Bank of England has announced its biggest interest rate increase in 27 years as it forecast that the war in Ukraine would fuel further inflation and tip the UK economy into a prolonged recession.

 

Soaring natural gas prices are likely to drive consumer price inflation to 13.3% in October 2022, from 9.4% in June, the bank said. That will push Britain into recession later in the year, with economic output declining each quarter from the fourth quarter of 2022 through the fourth quarter of 2023, bank forecasts show.

Those pressures persuaded the bank’s Monetary Policy Committee to boost its key interest rate by 0.5 percentage points, the biggest of six consecutive increases since December 2021. The rate now stands at 1.75%, the highest since the depths of the global financial crisis in late 2008.

Gov. Andrew Bailey defended the move, which will increase borrowing costs for consumers, affirming that the bank has a duty to control price increases that disproportionately affect the poorest in society. He acknowledges that this will have an impact on many people in the UK, and it will rise the cost of living, as inflation often hits the least well-off the hardest. However, he and the bank consider that inflation needs to be acted upon, or worse consequences would otherwise follow in the future.

Additional costs

The Bank of England estimates that gas and electricity bills will eat up an additional 3.5% of household incomes in the period from 2021-2023. That’s five times more than the increase UK households experienced during the energy crisis of the 1970s.

The Bank of England has announced its biggest interest rate increase in 27 years as it forecast that the war in Ukraine would fuel further inflation and tip the UK economy into a prolonged recession.

 

Although it was the first major central bank to start raising rates in December, the Bank of England has faced criticism in recent months as its peers began to move more aggressively. The US Federal Reserve increased its key rate by three-quarters of a point in each of the past two months to a range of 2.25% to 2.5%. The US economy shrank for a second straight quarter in the April through June period, raising fears that the nation may be approaching a recession.

The European Central Bank in July approved a larger-than-expected half-point increase as it targeted persistently high inflation. Recession is also a growing concern in Europe, where falling gas supplies may force factories to reduce operations this winter.

Victoria Scholar, head of investment at interactive investor, said the Bank of England approved a big increase because it didn’t want to fall behind the curve. The real risk is stagflation - a prolonged period of economic stagnation combined with rapidly rising prices that can be very difficult to get out of, she said.

Politics play a role

The central bank’s actions have become an issue in the contest to replace Prime Minister Boris Johnson, who will step down next month. Supporters of Foreign Secretary Liz Truss, the leading candidate to succeed Johnson, said Thursday she would revisit the question of whether the bank should remain independent.

The Bank of England has been independent of government control since 1997. The last time the UK increased interest rates by 0.5 percentage points was in December 1994, when rate decisions were still made by the government’s treasury chief in consultation with the central bank governor.

A first wave of inflation was triggered by international supply bottlenecks and increased demand for energy as the coronavirus pandemic began to ease in 2021. That was followed quickly by Russia’s invasion of Ukraine, which triggered sharp increases in food and energy prices.

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Keywords: central bank, inflation, report, interest rate
Categories: Banking & Fintech
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Countries: United Kingdom
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Banking & Fintech