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Bank of England raises interest rates at highest since 1989 even as protracted recession looms

David Milliken and Andy Bruce

LONDON (Reuters) – Bank of England’s biggest interest rate since 1989 But investors were warned on Thursday that Britain faces the risk of its longest recession in at least a century, meaning borrowing costs could rise less than they expected.

BoE raises bank rate from 2.25% to 3%, warns UK The economy may not grow for another two years – the longest on record dating back to the 1920 era – if interest rates rise as much as the market has been betting on lately As much as noted.

“We can’t commit to future rates, but from where we stand today, we believe bank rates must rise by less than what financial markets are currently pricing in,” Andrew Governor Bailey said in an unusually blunt message.

Sterling extended earlier losses, falling nearly 2% against the dollar on the day, hitting its lowest point since Britain’s recovery from a political crisis in mid-October bolstered by former Prime Minister Liz Truss’ tax cut plan provoke.

On Wednesday, the Fed also raised interest rates by 75 basis points, but signaled that U.S. borrowing costs could rise more than

This is in stark contrast to Thursday’s message from the Bank of England.

Bank of England says inflation is now expected to reach

-year highs this quarter, more than five times its 2% target. But it also believes the economy has entered a recession, which could mean it contracted at both 2024 and 2024 for a combined 2.9% contraction.

Unemployment will rise steadily to 6.4%, by the end of the period 1989, almost double the current 3.5%, which is higher since 1989*).

However, these forecasts reflect market expectations that bank rates will peak at 5.2% in late October, the UK The central bank said on Thursday it did not expect to reach that level.

Without further rate hikes, the Bank of England said the recession would be shorter, with a quarter of positive growth in the middle and a cumulative 1.7% output loss.

2023 – During the 9-year global financial crisis, the UK economy shrank by 6.3%.

Borrowing costs rose on Thursday – biggest in 40 years, aside from failed support 1992 Black Wednesday sterling – in line with economists’ expectations in a Reuters poll, but nine policymakers were divided.

Silvana Tenreyro and Swati Dhingra voted for a small increase of 25 and 0.5 percentage points, respectively, highlighting the headwinds from recession.

Markets expect the bank rate to be around 4.7%, little changed from the BoE statement.

“A dovish 75 base-point upward revision should be paradoxical…but that’s exactly what the UK The central bank seems to have achieved it,” said HSBC economist Liz Martins.

Unrest in the UK

Central banks in the Western world are dealing with similar challenges. Energy bills have emerged since the COVID- 19 pandemic and – in the case of Europe – since Russia invaded Ukraine in February leap.

Britain’s new Finance Minister Jeremy Hunt said, “The government’s priority is to control inflation, and today the central bank has acted in line with its objective to bring inflation back to target levels” .

The Bank of England has faced weeks of political and financial market turmoil since the last rate hike in September .

Just a day later, the Truss government launched an unfunded 45 billion pound ($ 52 billion) tax cut package has received a strong response from investors, pushing the pound to a record low against the dollar and forcing the Bank of England to support Bond market to help pension funds.

Truss had to resign after 44 days in office.

Markets are now more stable, with UK government borrowing costs roughly back to where they were before the turmoil. On Tuesday, the Bank of England was able to start selling bonds from its 838 £1 billion quantitative easing reserves.

The Bank of England’s policymaking is particularly tricky due to a lack of clarity about future government policy.

While most of Trus’ tax cuts have been withdrawn, new Prime Minister Rishi Sunak says public spending will be squeezed, possibly even higher taxes, the scale of which It won’t become clear until November’s financial statement 19.

The Bank of England assumes that the government will continue to provide energy subsidies for the next two years, but on a smaller scale after the existing support package expires in April.

Even if interest rates remain at 3%, inflation will remain below the 2% target in the medium term, according to BoE forecasts 2024.

But Bailey said that inflation risks are highly biased, and it is too risky to rule out further interest rate hikes.

The Policy Committee on Monday reiterated that it will respond vigorously if needed. It next announced a policy decision in December 15.

Chart: Central banks step up to fight inflation



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