Largest UK rate hike in 27 years; recession predicted - RTHK
A A A
Temperature Humidity
News Archive Can search within past 12 months

Largest UK rate hike in 27 years; recession predicted

2022-08-04 HKT 19:56
Share this story facebook
  • The UK will be in recession at the end of the year, according to the Bank of England. File image: Shutterstock
    The UK will be in recession at the end of the year, according to the Bank of England. File image: Shutterstock
The Bank of England (BoE) raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13 percent.

Reeling from a surge in energy prices caused by the war in Ukraine, the BoE's Monetary Policy Committee (MPC) voted 8-1 for a half percentage point rise in Bank Rate to 1.75 percent, its highest level since late 2008, from 1.25 percent.

The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.

MPC member Silvana Tenreyro cast a lone vote for a smaller 25-basis-point increase.

The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1 percent, similar to a slump in the 1990s but far less than the hit from Covid-19 and the downturn caused by the 2008-09 global financial crisis.

The economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since the global financial crisis.

Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3 percent in October, the highest since 1980, due mostly to the surge in energy prices. That would leave households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.

Sterling fell against the US dollar while futures priced in a further 25-basis-point rise in interest rates, to 2 percent, for the next BoE meeting in September.

"Today's decision confirms the notion of a central bank determined to crush inflation in the face of ongoing supply-side challenges, including a very tight labour market and soaring energy bills," said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.

The British central bank has now raised rates six times since December but Thursday's move was the biggest since 1995.

The pressure on BoE Governor Andrew Bailey and his colleagues to move in larger steps intensified after recent big rate hikes by the US Federal Reserve, the European Central Bank and other central banks.

Those moves weakened the value of the pound, which can add to inflation.

The BoE repeated that it was ready to move forcefully if needed to stem more persistent inflationary pressures.

But it stressed that there were "extremely large" uncertainties about the economy which could make the slowdown more or less severe than its core forecasts, and it would judge what its next moves should be as events unfold.

"Policy is not on a pre-set path," the BoE said. "The scale, pace and timing of any further changes in Bank Rate will reflect the Committee's assessment of the economic outlook and inflationary pressures." (Reuters)