Lhe Bank of England announced on Thursday, August 4, a 50 basis point increase in its key rates, a drastic measure to counter inflation which it now sees exceeding 13% over one year in October, when the United Kingdom will enter a recession until the end of 2023.
“The monetary policy committee opted by a majority of 8 to 1 for an increase in the key rate of 0.5 percentage point, to 1.75%”, explains the monetary institution in the minutes of the meeting, fitting the not to the US Federal Reserve and the European Central Bank in accelerating the pace of its hikes. It’s the BoE’s biggest rate hike since 1995, when UK inflation already hit 9.4% year-on-year in June, a 40-year high, fueling a looming cost-of-living crisis particularly the less wealthy British households.
Towards low growth
As gas prices have soared since Russia’s invasion of Ukraine began, the BoE expects UK energy regulator Ofgem to raise its electricity price cap for consumers by 75% in October. The regulator further announced on Thursday that the cap would now be revised quarterly, compared to only twice a year so far, to improve market stability, which in the current context suggests another painful rise in prices. from January.
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The damage will be heavy for the economy: “We expect a contraction in production each quarter between the last of 2022 and the last of 2023”, warns the bank. And “growth after this period remains very weak”, completes the monetary institute, which projects in detail a growth of 3.5% in 2022, a first contraction in GDP of 1.5% in 2023 and a second of 0. .25% in 2024.
In these circumstances, the BoE’s choice to raise its rates even faster than it has done since the end of 2021 risks weighing on economic activity by making borrowing more expensive for companies and individuals. “A faster pace of monetary policy tightening” today “should help bring inflation back to its medium-term target of 2%, and reduce the risk of a (monetary policy) tightening cycle longer and more expensive in the future”, explains the monetary committee. The BoE also indicated that it would vote in September on whether to begin actively selling the bonds it holds under its asset purchase program.