Wednesday, October 5, 2022
HomeEconomyBank of England raises interest rate to 2.25% despite possible recession

Bank of England raises interest rate to 2.25% despite possible recession

David Milliken and Farouk Suleiman

LONDON (Reuters) – The Bank of England raised its key interest rate to 2. 25% from 1.75% on Thursday, and said it would continue to “do on inflation as necessary” respond vigorously,” even as the economy entered a recession.

The Bank of England estimates the UK economy will shrink by 0.1% in the third quarter, partly due to an extended public holiday for Queen Elizabeth’s funeral, and a fall in output in the second quarter would meet the definition of a technical recession.

Economists polled by Reuters last week had forecast a repeat rate hike of 0.5 percentage points in August, but financial markets had bet on a 3 quarter point hike, which has been since since , unless a brief attempt to support GBP in 1992 fails.

GBP/USD fell more than half a cent and fell below $1 following the decision. 12, near $1 earlier in the day after hitting a 10 year low . 12. UK government bond prices fell sharply.

The Bank of England’s move comes after the Federal Reserve decided on Wednesday to raise its key interest rate by three-quarters of a percentage point, as global central banks grapple with post-coronavirus labor shortages and Russia’s invasion of Ukraine Impact on energy prices.

“If the outlook points to more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully if necessary,” the Bank of England said, using similar The wording expresses its policy intent.

The Bank of England’s Monetary Policy Committee voted 5-4 to raise interest rates to 2. 25%, with Lieutenant Governor Dave Ramsden and outside MPC members Jonathan Haskel and Catherine Mann voting for an increase to 2.5%, while new MPC member Swati Dhingra wants a small increase to 2% .

Financial markets are now pricing in about a 30 in 4 chance that the Bank of England will raise bank rates again to 2.75% next time January etc. The 3% rate was fully factored in before a decision was made.

“The Bank of England…still looks lagging compared to its international peers, which could keep the pound under selling pressure,” said Luke Bartholomew, senior economist at investment firm abrdn. . Build up 100 £1 billion in the coming year by allowing bonds to mature and through aggressive sales starting next month. This is in line with the goals it set out in August.

The Bank of England now expects inflation to peak at a slightly lower 12 level in October than the previous Monthly forecast 13.3% peak, before Liz Truss wins Conservative leadership and becomes UK Prime Minister with a promise to cap energy tariffs and tax cuts.

Inflation will remain above 10% for several months after October before falling again, The Bank of England said.

July consumer price inflation down from 40 year high 12 to 9.9% .1% in August, the first decline in nearly a year.

On Friday, new Finance Minister Kwasi Kwarteng will provide more details on the government’s fiscal plan, which could exceed 150 £1 billion in stimulus.

The Bank of England said it would assess the impact on the economy of monetary policy at its November meeting.

However, it noted that energy price caps, while reducing inflation in the short term, will further increase pressure.

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

LAST NEWS

Featured NEWS