The BoE said the economy had shrunk since the third quarter, entering a technical recession that is forecast to last until the first half of 2024…reports Asian Lite News
The central bank may opt to raise rates by as much as 1 percentage point to show it is serious about tackling inflation
The Bank of England has announced its biggest interest rate increase in three decades as it tries to beat back stubbornly high inflation fuelled by Russia’s invasion of Ukraine and the disastrous economic policies of former Prime Minister Liz Truss.
The bank boosted its key rate by three-quarters of a percentage point on November 3, to 3%, after consumer price inflation returned to a 40-year high in September.
The aggressive move to prevent inflation from becoming embedded in the economy was in line with market expectations after a more cautious half-point increase six weeks ago.
The interest rate decision is the first since Truss’ government announced 45 billion pounds of unfunded tax cuts that sparked turmoil on financial markets, pushed up mortgage costs and forced Truss from office after just six weeks.
Her successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills.
The rate increase is the Bank of England’s eighth in a row and biggest since 1992. It comes after the US Federal Reserve on November 2 announced a fourth consecutive three-quarter point jump as central banks worldwide tackle inflation that is eroding living standards and slowing economic growth.
Recession fears
Minutes of its meeting warned of a “challenging outlook for the UK economy” that was “expected to be in recession for a prolonged period”, dealing a blow to Britain’s troubled government.
The BoE said the economy had shrunk since the third quarter, entering a technical recession that is forecast to last until the first half of 2024.
The pound tumbled two percent against the dollar on expectations of a long-lasting recession.
“A typical textbook trade is out of the window because currencies usually move higher when a central bank increases rates,” noted Naeem Aslam, chief market analyst at Avatrade.
“Tough times are ahead, and we are going to see the economy, markets, and the currency tanking in the coming months.”
London’s FTSE 100 shares index fared better, losing about half-a-percent.
Cost-of-living crisis
The BoE rate increase is set to worsen a cost-of-living crisis for millions of Britons as hikes by central banks see retail lenders push up interest rates on their own loans.
“The central bank has had the unenviable job of fighting soaring inflation amid enormous economic and political uncertainty,” said Craig Erlam, analyst at trading platform OANDA.
Repayments on UK mortgages have surged in recent weeks also after the debt-fuelled budget of previous British prime minister Liz Truss spooked markets, forcing her to resign and triggering emergency buying of UK government bonds by the BoE.
Her successor Rishi Sunak has attempted to bring calm to markets by hinting at tax rises in a fresh budget on November 17, even if such a move further harms Britain’s economy.
“I think everyone knows we do face a challenging economic outlook and difficult decisions will need to be made,” Sunak, a former UK finance minister, told parliament on Wednesday.
British annual inflation stands at 10.1 percent, the highest level in 40 years.
As the Covid-19 pandemic began in early 2020, the BoE slashed its key interest rate to a record-low 0.1 percent and also pumped massive sums of new cash into the economy.
The Bank of England started raising rates last December, while Thursday’s hike was the eighth increase in a row.
“Importantly, most of the tightening in policy over the past year was yet to feed through to the real economy,” said the BoE minutes.
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