Bank of England makes biggest interest rate hike in 27 years

The Bank of England raised interest rates by half a percentage point on Thursday, the biggest jump since 1995, as politicians stepped up efforts to tackle inflation even as they warned Britain was headed for a long recession later this year. .

The bank raised rates from 1.25 percent to 1.75 percent, the highest since 2008, as it forecast the annual rate of inflation would top 13 percent when household energy bills rose in October. That would be the highest level of inflation in 42 years.

Much of the price increase still comes from the global energy market, the bank said. In the past three months, wholesale natural gas prices have almost doubled, and this is expected to push the peak price on household energy bills to 3,500 pounds (about $4,260) in the fall, three times more than the bills a year ago.

The outlook for millions of UK households is bleak. Income, once adjusted for inflation and taxes, is forecast to fall sharply this year and next, in the worst decline on record since the 1960s.

Britain will enter a recession in the last quarter of this year that will last until the end of 2023, the bank has forecast.

“The latest rise in petrol prices has led to another significant deterioration in the outlook for activity” in Britain and the rest of Europe, policymakers said according to the minutes of this week’s meeting. Britain “is now projected to enter a recession.”

Thursday’s rate change was the sixth increase since December as the bank tries to tackle inflation, which is at its fastest pace in four decades. It has been under some pressure to raise rates by more than its usual quarter-point move as inflation pressures persist and other major central banks also take more aggressive action to stem price increases.

In Britain, consumer prices rose 9.4 percent in June from a year earlier, faster than inflation in the United States and the eurozone. The Federal Reserve raised rates by three-quarters of a point recently and the European Central Bank raised rates by half a point last month, in the first move in more than a decade.

While policymakers have said they are committed to bringing inflation down to the bank’s 2 percent target, the risks of exacerbating an economic slowdown have increased.

The National Institute for Economic and Social Research, a London-based think tank, said on Wednesday that the economy was entering a recession this quarter and would lose 1 percent of gross domestic product in three quarters.

“We are really in stagflation here,” Stephen Millard, deputy director of the research institute, said before the bank’s decision. As high inflation meets a recession, household incomes are reduced because wage growth is not keeping up with rising prices. The research institute has called for more government support for low-income households as food prices continue to rise and household energy bills rise, perhaps by as much as 75 percent in the fall.

The Bank of England’s own forecasts are even more pessimistic. Next year, the economy will contract 1.5 percent, he predicted. He shows the scale of the economic challenge facing the two Conservative lawmakers fighting for the party’s leadership and the role of prime minister. Much of the debate so far has focused on taxes, with Liz Truss, the current front-runner, vowing to quickly cut taxes for workers and businesses amid a cost-of-living crisis.

Even as the economic outlook worsens, the central bank has emphasized its main objective of reducing inflation. Eight of the nine members of the rate-setting committee voted in favor of the outsized measure amid signs that inflationary pressures are becoming more persistent and are emerging in more parts of the economy.

The inflation picture has deteriorated rapidly. In December, when the bank first raised rates, it predicted inflation would peak at 6 percent in April. Now that peak is six months later and more than twice as high. Higher energy prices are a main reason for rapid inflation, the bank said, but supply chain disruptions and domestic inflationary pressures are also rising.

Inflation in consumer services, which are much less affected by global goods prices, rose 5.2 percent in June from a year earlier, the highest since early 1993. The tight labor market is also raising inflation. Unemployment is low and job vacancies are high, so underlying wage growth is rising as employers compete to hire and retain staff. Meanwhile, companies are passing on more of their cost increases to their customers.

Despite the fact that some factors that contribute to inflation are showing signs of easing, such as world commodity prices, policymakers were only somewhat comforted by these signs. There is a risk that a longer period of inflation generated by external factors, such as global energy prices and pandemic-related supply chain disruptions, will lead to “longer lasting” wage and price pressures in the country. , according to the record. This was one of the reasons for the higher-than-usual interest rate increase.

But with so much uncertainty about the economy and prices, the bank offered fewer clues about the future path of interest rates.

“The policy is not on a pre-established path,” the minutes said. “The scale, pace and timing of any further changes” in interest rates will depend on the committee’s assessment of the economy and inflation.

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