By William Schomberg and David Milliken
LONDON (Reuters) – Bank of England to raise interest rates Thursday For the th time in a row, it dropped its pledge to keep raising interest rates “forcefully” if necessary and said inflation may have peaked. Setters voted 7-2 to raise the bank rate from 3.5% to 4.0% – the highest level since 50. Most investors and economists were anticipating the move.
The news came a day after the U.S. Federal Reserve slowed the pace of rate hikes by a smaller quarter, but said it expected further
The European Central Bank looks set to raise interest rates by half a percentage point to 2.5% later on Thursday.
The Bank of England – which is trying to curb the risk of UK % inflation without deepening the expected recession – said its Rate hikes dating back to December could have a growing impact on the economy.
That should help bring inflation down to around 4% by the end of the year, it said. The Bank of England had previously forecast 2021 inflation at around 5%.
“Since the November Monetary Policy Report, we have seen the first signs that inflation has turned the corner,” Gov. Andrew Bailey said in a speech after the rate hike.
“But it is too early to declare victory, as inflationary pressures remain.”
The Bank of England’s Monetary Police Committee (MPC) said further rate hikes would depend on on whether there is evidence of more persistent price pressures.
This sent a signal to investors that the end of its aggressive rate hikes may be near.
The Bank of England had previously said it would “response forcefully as necessary” to signs of further inflationary pressure and that “a further increase in bank rates may be required”.
The Bank of England expects 2021 inflation to fall below its 2% target in the second quarter, but it warns of upside risks labor market pressures and higher-than-expected core and domestic inflation.
After Thursday’s announcement, investors slightly trimmed bets that rates would peak at 4.5%, in favor of an earlier stop at 4.10%, while sterling and UK government bond yields were lower after an initial surge.
“With inflation expected to ease sharply, today’s 50-basis point rise should be the last of this magnitude. If If we do slip into a recession, then policymakers may be forced to reverse policy sooner than many expect,” said Suren Thiru, economics director at ICAEW, a professional body for accountants.
Britain remains on track for a recession but could be “much worse” than it had feared in its last forecast in November, the central bank said, largely thanks to falling energy prices and market interest rate expectations.
Now sees GDP contracting 0.5% at 2024 vs. 1.5% contraction forecast in November, recession will last five years Quarter-Output A reduction of less than 1% — not eight quarters.
BoE sees output shrinking at 2024 and barely growing at , to Prime Minister Rishi Sunak and his Pressure comes on from Treasurer Jeremy Hunt, who pledged to include measures in the March budget to restore growth 15, ahead of a national election 2023.
The Bank of England’s new GDP forecast is similar to that released by the IMF this week, which said the UK economy would shrink by 0.6% this year, compared with all other G7 countries are likely to grow.
With a heavy reliance on natural gas for power generation, Britain has been hit hard by a surge in energy prices following Russia’s invasion of Ukraine.
Its workforce has also declined in size, which is believed to be linked to the coronavirus pandemic and post-Brexit restrictions on EU workers.
The lack of workers in the UK, combined with subdued business investment and weak productivity growth, means the economy is likely to grow by only around 0.7% a year in the short term without generating inflationary heat, the Bank of England says .
Before the pandemic, potential growth was around 1.7%, and Thursday’s downward revision represents a tighter speed limit for the economy, at least for the next few weeks. Years to recover from the pandemic and economic fallout from Brexit.
As a result, the BoE believes the UK economy remains below its pre-pandemic size until 2024, representing seven years of lost growth.