It works, it works, inflation. The Bank of England on Thursday estimated that the country will slip into recession because of runaway inflation. In response to this observation, it announced a drastic increase in its key interest rate by half a percentage point. The BoE’s decision to raise interest rates to 1.75%, a 50 basis point hike, the largest since 1995, also risks weighing on the economy by making borrowing more expensive.
UK inflation is set to rise further to over 13% in October, a record high since late 1980, after hitting 9.4% over a year in June, according to the monetary policy report. What complicates the task of the future prime minister amid the Conservative campaign to succeed Boris Johnson, who sees debates monopolized by the acute crisis in Britain’s cost of living.
Serious damage to the economy
The rise in gas prices since the start of Russia’s invasion of Ukraine has prompted the central bank to predict a painful 75 percent increase in the cap on electricity prices charged to consumers in October. The damage to the economy will be severe: “We expect production to fall every quarter” between the last three months of 2022 and the last three months of 2023, the Bank of England (BoE) warns.
And “growth after this period will remain very weak,” she adds, with an increase of 3.5% in 2022 but a first contraction in GDP of 1.5% in 2023 and a second of 0.25 % in 2024. “I understand those who are wondering why we are raising interest rates now and making life more difficult,” BoE Governor Andrew Bailey assured during a conference. “But the alternative is worse,” he stressed.
“All options on the table”
“Our job is to prevent inflation from leveling off beyond two or three years,” as it did in the 1970s, adds Monetary Policy Committee member Ben Broadbent. According to the BoE, it is better to act stronger now than to wait for the tightening cycle to take hold over time.
Andrew Bailey indicated that for the forthcoming meetings “all options will be on the table” and that the fight against inflation remains his priority. The BoE follows the example of the US Federal Reserve and the European Central Bank, which decided to hike interest rates by 0.75 and 0.50 percentage points respectively in July. The UK central bank has indicated that in September it will also vote on the possibility of beginning active sales of the bonds it holds as part of its asset purchase programme.