Nightmare before Christmas: Bank of England hikes rates by 50bps as it expects 13% inflation and a long recession

The Bank of England (BoE) fulfilled the scenario expected by analysts. Its Monetary Policy Committee (MPC) decided on Thursday to raise interest rates by 50 basis points, from 1.25% where they were due. 1.75%the highest level since late 2008. The BoE has not raised the price of silver that much since 1995. This is in fact the biggest increase since the institution broke away from the British government at the end of the 20th century. It is also, the sixth consecutive ascent types in the UKwhere prices are rising at a pace not seen in decades, like in the rest of the major Western powers.

Investors and analysts assumed that the Bank of England would “step on the accelerator”, and it did. BoE Governor Andrew Bailey admitted this possibility last June. Finally, the British monetary institution raised interest rates by 50 basis points, which it had not done for 27 years. The price of silver therefore falls to 1.75%, a level not seen since December 2008.

The decision was made with eight votes for face to face within the MPC, as indicated your statement. “We expect a 7-2 vote in favor of a 50 basis point hike,” predicted analysts at Bank of America (BofA). The only member of the “undisciplined” organization this time preferred that the increase be more limited, by 25 basis points.

In the June meeting, the committee voted 6 to 3 in favor of a 25 basis point increase. The lack of unanimity suggested that the decision to relaunch more aggressively was not going to be made by a large majority this week, but the picture has changed.

sixth consecutive increase

This rate hike is the sixth in a row in the UK. The BoE has started to tighten its monetary policy by raising the price of silver on last december. But the last five times, increases undertaken by the MPC were 25 basis points.

Why has the Bank of England chosen this time to be more falcon or “aggressive”, tightening its monetary policy more firmly? The answer lies, once again, in rising inflation.

The Consumer Price Index (CPI) in the UK increased in June to 9.4% annual (see graph), a level not seen for more than 40 years. And it is to be hoped that it increased again last month, in line with what happened in its neighbor the euro zone, where the CPI set a new record in July.

The BoE expects inflation at 13% and anticipates a sharp recession soon

Inflation is “well above” the BoE target, at 2%, as the institution itself admits in its press release on Thursday. In The document The Bank of England also points out that inflationary pressures in the UK and the rest of Europe have intensified significantly, reflecting “largely a near doubling of wholesale gas prices since May, due to the restriction of gas supply to Europe by Russia and the risk of further restrictions”.

The British central bank stresses that the expected rise in prices for energy »will aggravate the decline in real household income and further increase CPI inflation of the United Kingdom in the short term”.

In fact, the BoE’s estimates aren’t exactly flattering: it sees the CPI rising more than 13% in Q4 2022, and remain at very high levels for much of 2023before falling to the target of 2% in two years.

Britain’s CPI did not reach a rate of 13% Since 1980that is to say the last part of the deep recession experienced in the late 1970s and early 1980s due to the first oil shock. Then inflation in the UK hit 15.1%, according to data from the Office for National Statistics (ONS), although the body says the historical series from then and the current one are not entirely comparable.

Thus, the Bank of England predicts that the United Kingdom will enter a recession from fourth quarter of this year. He predicts that real after-tax household income will fall sharply in 2022 and 2023, while consumption growth will turn negative.

In detail, the projections envision that “domestic inflationary pressures will remain strong in the first half of the forecast period.” And add that companies “expect to increase their selling prices in particularreflecting the sharp increase in their costs.

The monetary institution stresses that all the scenarios it has prepared “show very high short-term inflation, lower GDP next year and a marked decline in inflation thereafter.”

Global monetary tightening

The sharp rise in prices on a practically global level has caused the main world central entities to restrict their monetary stimuli to the economy, even with the risk that this implies stop economic growth.

Last week, the Federal Reserve (Fed) made another historic rate hike at 75 basis points in the USA. And the previous week, it was the European Central Bank (ECB) that activated the first increase in the price of silver in the euro zone in 11 yearsalso at 50 basis points.

Yesterday, the Reserve Bank of Australia (RBA) also executed a 50 basis point hike to 1.85%. Inflation in the country, which stands at 6.1% and is the highest in more than two decades, will reach 7.75% in December, according to forecasts by the central bank, which does not rule out a new rising interest rates in the coming months. .

Late last month, the ECB surprised with the first interest rate move in almost eleven years. It was historic for two reasons: the increase was 50 basis points at once, unheard of for 22 years. The other reason is that the Eurozone officially abandoned negative interest rates for the first time since 2014. High inflation and aggressive monetary tightening in other jurisdictions forced the ECB to break its roadmap in order to not to be left behind by the rest of the central banks. . Only a handful of them are keeping rates low, including the People’s Bank of China and the Central Bank of Japan.


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