Bank of England hikes by 50 basis points, says UK may already be in recession

The Bank of England raised interest rates by 0.5 percent on Thursday.
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LONDON — The Bank of England voted to raise its base rate to 2.25% from 1.75% on Thursday, lower than the 0.75 percentage point increase that had been expected by many traders.

Although inflation in the U.K. fell slightly in August, it continued to rise. at 9.9% year-on-yearThe inflation rate remained at 2%, which is well below the target of the bank. Food and energy have experienced the largest price increases, while core inflation (which strips away those components) is at 6.3% annually. 

According to the BOE, inflation will peak in October at less than 11% as opposed to 13% previously forecast.

The smaller-than-expected hike came as the bank said it believed the U.K. economy was already in a recession, as it forecast GDP would contract by 0.1% in the third quarter, down from a previous forecast of 0.4% growth. This would be following a decrease of 0.1% in the second quarter.

Many analysts are available, as well as business associations. British Chambers of CommerceAccording to, they anticipate the U.K. entering recession in the next year. The U.K. is also facing trade bottlenecks because of energy price fluctuations. Covid-19The decline of consumer sentiment after Brexit and falling retail sales.

To support spending and growth during the coronavirus pandemic, the BOE lowered its key rate (also known as the bankrate) from 0.1% to 0.1%. The BOE was one of the first to start a new hiking cycle in December after rising inflation late last year. 

Seventh consecutive rise

This marks the seventh consecutive rise of U.K. interest rate and raises them to an level not seen since 2008.

Bank released an explanation explaining their decision. They noted volatility in wholesale gas prices and said that government announcements about energy bills caps will limit future increases in inflation. It said that there were more indicators since August of domestically-generated inflation.

They added, “The labor market is tight. Domestic cost and price pressures continue to be elevated. The [energy bill subsidy]This reduces inflation for the immediate term. It also implies that household spending will likely be lower than expected in the August Report during the first two year of the forecast period.

Five of its Monetary Policy Committee members voted to increase the rate by 0.5 percentage points, with three voting for an even higher 0.75 percent point increment that was expected. One member voted to increase the rate by 0.25 percentage points.

It said that it wasn’t on a “preset path” but would continue to analyze data to make decisions about the pace, timing, and size of future rate increases. Following the meeting, the committee approved the immediate sale of U.K. Government bonds in its asset acquisition facility. They also pointed out a sharp increase in global government bond yields.

The backdrop to the increasingly fragile economy means that this bank has made a decision. British poundNew Prime Minister Liz Truss will introduce new economic policies and forecasts for recession. 

Sterling hit fresh multidecade lows against the dollarThrough Wednesday, it traded below $1.14 and fell below $1.13 by Thursday morning. This year, it has plunged against the greenback and last reached this level in 1985. After the BOE’s decision, the full 0.5 percentage points rise was fully priced in. It rose 0.2%.

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The devaluation of the pound has been caused by a combination of strength in the dollar — as traders flock to the perceived safe haven investment amid global market volatility and as the U.S. Federal Reserve hikes its own interest rates — and grim forecasts for the U.K. economy. 

Friday Mini-budget

In between, however, the country is newly formed governmentNumerous important economic policy suggestions have been made by the government this month, ahead of an “fiscal event,” also known as a mini budget. They will officially be announced Friday.

The plan includes a reverse of recent increases in National Insurance Tax, reductions in levies to homebuyers and plans for investment zones with low taxes.

Truss is repeatedly stressedA commitment to lower taxes to increase economic growth.

The government announced an enormous spending plan to reduce the rising costs of energy due to the crisis. householdsAnd businesses.

Data published Wednesday showed the U.K. government borrowed £11.8 billion ($13.3 billion) last month, nearly twice as much as forecast and £6.5 billion more than the same month in 2019, due to a rise in government spending.

‘Critical moment’

David Bharier is the head of research for the British Chambers of Commerce. He said that the bank had to balance the use of the blunt tool of rate increases to manage inflation.

“The bank’s decision to raise rates will increase the risk for individuals and organisations exposed to debt burdens and rising mortgage costs – dampening consumer confidence,” he said in a note.

The recent announcements of energy price caps have given some relief to households as well as businesses, which should reduce inflation.

The bank was trying to decrease consumer demand while the government is seeking to grow, he said. He added that the Friday economic statement of the finance minister would be a crucial moment.

Chief U.K economist for Pantheon Macroeconomics Samuel Tombs said that the bank is hiking at “sensible speed” due to the low inflation outlook and the emerging economic slack.

Tombs expected a 50 basis-point increase in the bank’s November meeting. There are potential risks for a 75-basis-point hike, given the committee members’ hawkishness. This would be followed by 25 basis points of increase in December to bring the bank rate up to 3% at year’s end. There will not be any further increases next year.

Inflation isn’t just a problem for the United Kingdom. The European Central Bank raised ratesThis month’s rate was 75 basis points lower than usual, and Switzerland’s central banks were at its lowest point. hikedWednesday morning, by 75 basis point Federal Reserve of the United States increased its benchmark rate rangeWednesday: The same amount.

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