The Bank of England remains committed to the “key target” it defined for lowering inflation, but hopes that the markets will “re-anchor” their expectations regarding interest rates, the bank’s chief economist Hugh Peele told Bloomberg today (Friday).
Yesterday the Bank of England raised the interest rate by 0.75%, its biggest increase since 1989, and warned of a prolonged recession, while trying to temper market expectations for further tightening of aggressive monetary policy.
The Bank of England set an inflation target of 2%, but price increases peaked at 10.1% in September, and are expected to continue to rise in the fourth quarter. “We need to raise interest rates and tighten monetary policy to meet our target,” Peel said. According to him, “the fact that there were disturbances in the markets did not deter us or divert us from our key medium-term goal and that of the Monetary Policy Committee.”
Peel hinted that the recent volatility in the UK economy, which was reflected in the panic in the foreign exchange and bond markets – and was created against the background of the economic plan of Liz Truss – distorted the expectations of the markets about future interest rate increases by the bank. “We do not think that interest rates should rise as high as the market is pricing, precisely because this would lead to a greater than necessary slowdown in the economy, in order to control inflation,” emphasized Phil.
The bank now expects the economic recession that began in the second half of 2022 to last until mid-2024, in what is expected to be the longest period of consecutive contraction of UK GDP since records began. the balance between what will bring us back to the 2% inflation target, without creating unnecessary problems on the real level of the economy.”