The Bank of England announced this Thursday the biggest rate hike since 1992, raising the reference rate by 75 points (0.75%), to 3%. With rates at their highest level since 2008, the entity seeks to quell the runaway inflation that the United Kingdom is dragging on (10.1%), which is still struggling against the doubts generated by the economic plan of former Prime Minister Liz Truss. In the background, a warning: times of severe recession are coming.
The aggressive move, voted for by a 7-2 majority, has been in line with market expectations after a more cautious rise of half a point six weeks ago. The decision joins that of the Fed, with the same rise this Wednesday, or that of the ECB, which last week took rates to 2% with another increase of 75 points. The monetary policy maker cooled off the possibility of more steep increases, saying she faces a long and painful recession.
In its statement, the entity indicated that the United Kingdom has a "very difficult" outlook. The British economy has already entered a contraction that will lead to a recession that could last two years. It would collect the third and fourth quarters of 2022, all of 2023 and the first half of 2024. Among the reasons, high energy prices and tighter financial conditions that "weigh on consumption."
The Bank forecasts that inflation will reach a 40-year high of around 11% during the current quarter. "Such a large rate hike may seem unwarranted given signs that activity is already contracting, but there is as yet little evidence that the slowdown is enough to rein in inflation," analyzed Hugh Gimber of JP Morgan AM.
Across the globe, central banks have struggled to contain inflation. After an initial stage of contemplation, their response has intensified in recent months, when it has already become clear that inflation was taking root in the economy, with higher borrowing costs and demands for higher wages.
