Thursday, July 25, 2024
HomeBusinessBank Of England Delivers Biggest Rate Hike Since 1995, Warns Of Recession

Bank Of England Delivers Biggest Rate Hike Since 1995, Warns Of Recession

…The central bank projects that Britain will enter a recession by the end of 2022

…The Bank of England raised its benchmark interest rate by 50 basis points on Aug. 4, its largest increase in 27 years.

The Bank of England raised its primary interest rate by half a percentage point — its largest increase since 1995 — and warned that Britain would enter a protracted recession before the end of the year.

The rate hike was announced Thursday in a statement following a Wednesday meeting of the bank’s monetary policy committee. It received the support of 8 out of 9 central bank committee members, while the ninth member preferred a more modest rate hike of 0.25 percent.

The group of central bankers also warned that Britain would enter a recession by the last quarter of 2022, pointing to spiking energy prices that have weighed on Europe’s economy since Russia attacked Ukraine. They signaled that inflation is likely to worsen in Britain before it gets better. And they projected that the slump will be long-lasting, with inflation-adjusted household income falling sharply in 2022 and 2023.

“The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe,” the bank wrote in its announcement.

Nations move to tackle inflation, increasing risk to global economy

Britain’s rate hike is the latest escalation in global policymakers’ attempts to put a lid on rising prices. Inflation has grown throughout Europe, driven in part by the Russian invasion in Ukraine, which has upended the flow of energy markets on which many parts of Europe depend. Higher prices throughout the 19-nation euro zone, of which Britain is no longer a part, reached 8.6 percent in June, the highest level in decades, prompting the European Central Bank to raise interest rates by half a percentage point last month.

In Britain, inflation is even higher, reaching 9.4 percent in the 12 months ending in June, driven by higher energy and food prices.

The Bank of England rate hike follows the U.S. Federal Reserve, which has been raising rates at a faster clip, already four times this year.

Increasing interest rates make it more expensive to borrow, slowing down business investment, home-buying and debt-fueled transactions more broadly. Higher interest rates work to decrease inflation, but some economists worry that they can also increase the risk of recession as economies slow down.

The changing shape of inflation

The Bank of England wants to cut the rate of inflation down to 2 percent, but it believes inflation problems could get worse before they improve. It projects that Britain’s consumer price index will rise higher than 13 percent in the fourth quarter of 2022 and remain at “very elevated levels” through 2023.

Britain has been grappling with broad-based price increases that are even worse than in the United States. Britain’s consumer price index hit a 40-year high for that nation in June, at 9.4 percent, an acceleration from the previous month’s year-over-year increase of 9.1 percent.

Housing has become even more expensive there, along with electricity, gasoline, motor oil and other fuels.

Thursday’s announcement also made clear that central bankers are prioritizing price stability over economic growth, with hints that more aggressive action might be needed if inflation worsens.

The monetary policy committee “will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit,” bank policymakers wrote, later adding that it will be “particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

The U.S. rate-raising campaign has met with repeated sell-offs in financial markets, as investors recalibrate portfolios. The Dow Jones industrial average is down more than 10 percent year-to-date even after its more recent rallies.

Britain’s FTSE 100 index, which tracks the 100 most capitalized companies on the London Stock Exchange, was up 0.5 percent on the news Thursday. The British pound lost value, compared with the dollar, erasing earlier gains.


Most Popular

Latest Post