UK: Bank of England raises rates by half a point despite the risk of a protracted recession, Market news

(updated with details)

William Schomberg and David Milliken

LONDON, Aug 4 (Reuters) – The Bank of England (BoE) on Thursday implemented the biggest hike in its key interest rate in 27 years in a bid to stem inflation that is expected to peak at more than 13% this year in the UK. while warning that a long recession is inevitable.

The Bank of England raised its key rate by half a point to 1.75%, the highest level since the end of 2008, as expected by the vast majority of economists and analysts polled by Reuters ahead of the Monetary Policy Committee (MPC) meeting.

The decision was taken by eight votes, and only one member of the Committee – Silvana Tenreiro – voted for an increase limited to 25 basis points.

The Bank of England has warned that the UK economy will contract from the fourth quarter until 2023, in what will be the longest recession since the global financial crisis of 2008-2009.

At the same time, consumer price inflation should peak at 13.3% year-on-year in October, mainly due to a sharp increase in energy prices associated, in particular, with the war in Ukraine.

After that, British consumers will see their disposable income fall for two consecutive years.

Inflation in the UK reached its highest level since 1982 at 9.4% in June, more than four times the 2% target set by the Bank of England.

This rise in the cost of living has sparked a multiplication of social movements, in particular railroad strikes, and increased pressure on succession hopeful Boris Johnson to provide additional financial assistance to households.

The Bank of England had previously predicted that inflation would peak at over 11% and the economy would nearly stagnate until at least 2025.

In its new forecast, the central bank estimates that inflation will fall to 2% within two years as the hit to the economy spreads to demand.

NO PREDEMINED PLAN

The British central bank has raised rates six times since December, but the magnitude of the hike passed on Thursday is the largest since 1995.

Pressure on members of the institute to accelerate monetary tightening intensified following tightening by the US Federal Reserve, the European Central Bank and other major central banks.

The Bank of England reiterated that it stands ready to act decisively if necessary to contain more persistent inflationary pressures.

But she stressed that there are “extremely large” uncertainties about the economy and that she will judge the next steps depending on how the situation develops.

“Policy is not moving along a predetermined trajectory,” the Bank of England said. “The scale, speed and timing of any further rate changes will reflect the committee’s assessment of the economic outlook and inflationary pressures.”

The Bank of England also indicated that it plans to begin selling government bonds on its balance sheet with active sales of around £10bn per quarter shortly after its next meeting in mid-September.

In financial markets, the FTSE 100 added 0.49%.

British 10-year government bond yields fell 1.837% after the announcement, while the pound fell 0.54% against the dollar.

“The decision to raise the rate by 0.50% did not come as a surprise. However, the gloomy outlook for GDP and inflation forecasts included in the release shook market confidence, causing the pound to fall,” Vice President Sam Cooper said. at a Silicon Valley bank. (Report by William Schomberg and David Milliken with Andy Bruce, French version of Laetitia Volga, edited by Nicolas Delame and Jean-Stephan Bross)