The Bank of England reports a 10% risk of recession and inflation as it raises interest rates again

A man wearing a protective face mask walks past the Bank of England (BoE), after the Bank of England became the world’s first central bank to raise interest rates since the coronavirus (COVID-19) pandemic, in London, Britain, December 16, 2021 Photo: Toby Melville – Reuters

LONDON (Reuters) – The Bank of England sent a stark warning that Britain risks a double whammy of recession and inflation above 10 per cent as it raised interest rates on Thursday to their highest since 2009, up a quarter of a percentage. Point to 1%.

Sterling fell more than a cent against the US dollar to reach its lowest level since mid-2020, below $1.24, as the Bank of England’s dismal outlook for the world’s fifth-largest economy surprised investors.

They also reduced bets that the central bank will raise interest rates aggressively this year. Short-term UK government bond yields fell sharply.

Nine rate-setters at the Bank of England voted 6-3 to increase the bank rate from 0.75%, with Katherine Mann, Jonathan Haskell and Michael Saunders calling for an even larger increase to 1.25%.

Economists polled by Reuters had expected standard borrowing costs to rise to 1 percent by an 8-1 vote, while one policymaker opposed the increase.

Central banks are scrambling to deal with soaring inflation that they described as temporary as it began with the reopening of the global economy after the pandemic, before the Russian invasion of Ukraine caused energy prices to soar.

The Bank of England said it is also concerned about the impact of the renewed COVID-19 lockdown in China which threatens to once again damage supply chains and increase inflation pressures.

But policymakers around the world are also trying to avoid pushing their economies into recession.

“It’s a very weak forecast and a very sharp slowdown,” Bank of England Governor Andrew Bailey told reporters.

“There’s a technical definition of a recession that it doesn’t meet – but put that aside – it’s a very sharp slowdown in activity.”

On Wednesday, the US Federal Reserve raised interest rates by half a point to the 0.75-1.0% range, the largest increase since 2000. President Jay Powell said more such hikes are on the table.

But Powell said the US economy has been doing well, contrary to Bailey’s more pessimistic assessment.

The Bank of England’s rate hike was the fourth since December, the fastest rate of policy tightening in 25 years.

The Bank of England said most policy makers believed that “a degree of monetary tightening may remain appropriate in the coming months”. The word “modest” has been dropped to describe a measure of future price hikes.

A split emerged, with two members saying the guidance is too strong given the risks to growth.

“The new expectations, combined with the growing division among committee members, suggest the bank is coming to a pause in the tightening cycle,” said James Smith, economist at ING.

Soren Theroux, head of economics at the British Chambers of Commerce, said the rate hike and deteriorating outlook would lead to “significant anxiety among households and businesses”.

UK consumer price inflation hit a 30-year high of 7% in March, more than triple the Bank of England’s 2% target, and the central bank revised its price growth forecast to show it had peaked above 10% in the last three months of this. public.

It had earlier forecast a peak of around 8% in April.

The Bank of England said British inflation will peak later than in other large advanced economies due to a cap on household energy charges. Fuel bills jumped 54% in April, and the Bank of England is now seeing another 40% increase in October, taking its toll on the economy.

Real household disposable income after taxes – a measure of living standards – is expected to fall 1.75% this year, the largest decline in a calendar year since 2011 and the second largest since BoE records began in the 1960s.

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Inflation will hurt “those with the least bargaining power and those who are often the least affluent”, Bailey said, describing this effect as a “great concern”.

The Bank of England kept its forecast for economic growth this year at 3.75%, but lowered its forecast for 2023 to show a contraction of 0.25% from previous estimates of 1.25% growth. It cut its growth forecast for 2024 to 0.25% from 1.0% previously.

While growth in the first three months of this year was stronger than the Bank of England expected, it expects the economy to stagnate in the second quarter, due to an additional public holiday and reduced COVID testing. It sees a roughly 1% drop in GDP last quarter as the next hike in energy prices kicks in.

Those predictions were based on bets in financial markets that the Bank of England will raise interest rates to around 2.5% by the middle of next year, which the central bank has probably signaled too much.

She said she expects inflation to fall to 1.3% within three years, based on market pricing of interest rates, as rising unemployment and the pressure of the cost of living have taken their toll on the economy. That would be the biggest shortfall relative to its 2% target since the 2008-2009 global financial crisis.

The Bank of England also said it would work on a plan to start selling government bonds it has bought since that crisis, which currently amount to less than 850 billion pounds ($1.05 trillion).

BoE staff will update the MPC on the plan at its August meeting which would “allow the committee to make a decision at a later meeting on whether to start sales”.

(dollar = 0.8067 pounds)

Additional reporting by Andy Bruce Writing by William Schomberg Editing by Catherine Evans

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