Bank of England hikes, says UK already in recession | Daily News Byte

LONDON – The Bank of England voted to raise its base rate to 2.25% from 1.75% on Thursday, less than the 0.75 percentage point increase expected by many traders.

Inflation in the UK eased slightly in August but remained well above the Bank’s 2% target at 9.9% year-on-year. Energy and food prices have seen the biggest increases, but core inflation, which strips out those components, is still at 6.3% year-on-year.

The BOE now expects inflation to peak at just under 11% in October, down from a previous forecast of 13%.

The increase was in line with economists’ forecasts, according to Reuters, although many in the market had expected a 75-basis-point hike in line with the U.S. Federal Reserve and several other major central banks.

The Bank of England said it believed the UK economy was already in recession, as it forecast GDP would contract by 0.1% in the third quarter, down from a previous forecast of 0.4% growth. That would follow a 0.1% decline in the second quarter.

A number of analysts with the British Chambers of Commerce Business Association previously said they expected the UK to enter recession before the end of the year. Along with energy price shocks, it faces trade barriers due to Covid-19 and Brexit, declining consumer sentiment and declining retail sales.

The BOE cut its key rate, known as the Bank Rate, to 0.1% in March 2020 in an effort to spur growth and spending at the start of the coronavirus pandemic. However, as inflation began to pick up late last year, it was one of the first major central banks to begin a hiking cycle at its December meeting.

This is its seventh consecutive increase and takes UK interest rates to levels last seen in 2008.

In a release explaining its decision, the bank noted volatility in wholesale gas prices but said the government’s announcement of caps on energy bills would limit further increases in consumer price index inflation. However, it said there were further signs of “sustained strength in domestically generated inflation” after August.

He adds: “The labor market is tight and domestic spending and price pressures remain elevated [energy bill subsidy] As inflation eases in the near term, it also means that household spending is likely to be weaker than projected in the August report in the first two years of the forecast period.”

Five members of its Monetary Policy Committee voted for a 0.5 percentage point hike, while three voted for the 0.75 percentage point increase that many had expected. One member voted for a 0.25 percent increase.

The bank said it was not on a “pre-set path” and would continue to evaluate the data to determine the scale, pace and timing of future rate changes. The committee voted immediately after the meeting to start selling UK government bonds held in its asset purchase facility and noted a “sharp rise in government bond yields globally”.

The bank’s decision comes against a backdrop of growing weakness British poundRecession forecasts, the European energy crisis and a program of new economic policies will be presented by new Prime Minister Liz Truss.

Sterling hit fresh multi-decade lows against it dollar This week, trading below $1.14 through Wednesday and dipping below $1.13 early Thursday. It has fallen sharply against the greenback this year and was last at this level in 1985. It rose 0.2% after the BOE’s decision, with an absolute cost of 0.5 percentage points.

The pound’s depreciation has been driven by a combination of strength in the dollar – as traders turn to safe-haven investments amid global market volatility and the US Federal Reserve raising its own interest rates – and dire forecasts for the UK economy.

Meanwhile, the country’s newly formed government has presented a number of significant economic policy proposals this month ahead of a “fiscal event”, known as a mini-budget, when they will be officially announced on Friday.

This is expected to include recent increases in National Insurance Tax, reduced levies for businesses and home buyers and plans for “investment zones” with lower taxes.

Truce has repeatedly emphasized his commitment to cutting taxes to spur economic growth.

However, the energy crisis has also meant that the government has announced a huge spending package to curb rising bills for households and businesses.

Data published on Wednesday showed the UK government borrowed £11.8 billion ($13.3 billion) last month, almost double estimates and £6.5 billion more than the same month in 2019, due to a rise in government spending.

David Bharier, head of research at the British Chambers of Commerce’s business group, said the bank faced a “difficult balancing act” in using the ambiguous tool of a rate hike to tame inflation.

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

“The recent energy price cap announcements should have brought some comfort to businesses and households alike and should put downward pressure on inflation rates.”

“The bank, which wants to reduce consumer demand and the government, which wants to boost growth, may now move in the opposite direction,” he added, adding that Friday’s upcoming economic statement from the finance minister was a “critical moment”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the bank was raising at a “sensible pace” given the low inflation outlook and the looming slowdown in the economy.

Tombs had forecast a 50 basis point hike at the bank’s November meeting, with risks to a 75 basis point hike due to the intelligence of three committee members. This is likely to be followed by a 25 basis point hike in December, which will take Bank Rate to 3% at the end of the year, with no further hike next year, he said.

The UK is not alone in raising interest rates to fight inflation. The European Central Bank raised rates by 75 basis points earlier this month, while Switzerland’s central bank raised rates by 75 basis points on Thursday morning. The US Federal Reserve on Wednesday increased its benchmark rate range by the same amount.