of bank of england released a dire vision of the UK economy on Thursday, predicting a prolonged recession starting later this year due to the effects of high inflation. But the central bank has stepped up its efforts to combat rising prices by raising interest rates by half a percentage point, the largest since 1995.
The bank raised the base rate to 1.75%, the highest since 2008, as it expects annual inflation to exceed 13% when household energy bills jump in October. This is his highest inflation rate in 42 years and six times the bank’s 2% target.
The bank said much of the price spike was still driven by global energy markets. In the last three months, wholesale natural gas prices have nearly doubled this winter. The bank predicts he will push home energy bill caps to £3,500 (about $4,245) in the fall. That’s three times what he was a year ago.
The outlook for millions of UK households is grim. Adjusted for inflation and taxes, incomes are projected to fall sharply this year and next, the worst on record since the 1960s.
The UK, the world’s fifth-largest economy, entered a recession in the fourth quarter of this year, which banks predict will last until 2023. 2008 financial crisis.
According to the minutes of this week’s meeting, policymakers said “the recent rise in gas prices has further significantly weakened the outlook for activity” in the UK and other European countries. The UK is “currently projected to enter a recession”.
The rate change announced on Thursday was the sixth hike since December as banks try to tackle inflation running at its fastest pace in 40 years. As inflationary pressure persists and other major central banks take more aggressive action to halt inflation, they are forced to raise interest rates by more than the usual 0.5 percentage points.
The Bank of England was the first major central bank to start raising rates in response to the global inflation struggle, as it curbed monetary policy. It supported the economy during the pandemic. The European Central Bank last month raised interest rates for the first time in over a decade. Also in the US, the Federal Reserve raised his three-quarter percentage point last week for the second straight month.
While there is little banks can do to bring down energy prices or mitigate supply chain disruptions, their goal is to make it more expensive for consumers and businesses to borrow money, so that rapid prices will continue to rise. So far, unemployment rates have remained generally low in the United States, the European Union, and the United Kingdom, but policy makers seeking to bring You run the risk of getting fired. The International Monetary Fund warned last month that a global recession could be on the horizon.
Global inflation has been exacerbated by the war in Ukraine and Western sanctions against Russia, further disrupting supply chains and increasing the cost of energy.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
“War has an economic cost,” Bank President Andrew Bailey said Thursday. “But we will not deviate from setting monetary policy to return inflation to the 2% target.”
In the UK, consumer prices rose 9.4% year-on-year in June, faster than inflation in the US and the Eurozone.
The National Institute for Economic and Social Research, a London think tank, said Wednesday that the economy was entering a recession this quarter, with 1% of gross domestic product lost over three quarters.
“We’re really in stagflation here,” Stephen Millard, deputy director of the Institute, said before the bank’s decision.
Household incomes are being squeezed as wage growth has not kept pace with rising prices as high inflation faces a recession. Research institutes are calling for more government support for low-income households as food prices continue to rise and households are shrinking. Utility costs In the fall it probably jumps as much as 75%.
The Bank of England’s own forecast is even more pessimistic. Assuming no change in fiscal policy, the economy is projected to contract by 1.5% next year. This shows the scale of the economic challenges facing his two Conservative MPs, who are vying for the role of party leader and prime minister. Much of the debate so far has centered on taxes, with front-runner Liz Truss vowing to cut taxes quickly for workers and businesses amid a cost-of-living crisis.
Mr Truss also said he would reassess the bank’s mandate from the government to ensure price stability. To ensure that it “matches some of the most effective central banks in the world in controlling inflation.” The central bank has been independent of the Treasury since his 1997, but the government still sets inflation targets. Truss added that it has been a long time since the power of attorney was scrutinized.
At a news conference on Thursday, Mr Bailey avoided getting caught up in speculation about the new mandate.
Central banks have emphasized keeping inflation in check as their primary goal, even as the economic outlook deteriorates. Eight of the nine members of the Interest Rate Setting Committee voted for the unusual move, amid signs that inflationary pressures are becoming more persistent and emerging in more parts of the economy.
“The combination of near-term high inflation and weak activity leading to a recession is a challenging backdrop for monetary policy,” Bailey said, but said the focus should continue on inflation and inflation expectations. .
The inflation situation is deteriorating rapidly. The bank first hiked rates in December, and inflation he predicted would peak at 6% in April. Now that peak he is six months behind and more than twice as high. Rising energy prices were the main reason for the rapid inflation, the bank said, but supply chain disruptions and domestic inflationary pressures are also mounting.
Far less influenced by global commodity prices, consumer services inflation rose 5.2% year-on-year in June to its highest level since early 1993. A tight labor market is also pushing up inflation. Underlying wage growth is rising as employers compete to hire and retain employees due to low unemployment and high job openings. On the other hand, companies are passing on a greater part of the cost increase to their customers.
Some inflation drivers, such as global commodity prices, are showing signs of easing, but policy makers have taken little comfort from these signals. Prolonged inflation driven by external factors such as global energy prices and pandemic-related supply chain disruptions would make domestic price and wage pressures “more permanent,” the minutes said. pointed out the risks. This is one of the reasons for the larger-than-usual rise in interest rates.
Bailey said there were “very big” risks to the bank’s economic and inflation forecasts. However, based on financial market expectations of the future path of interest rates, inflation should fall towards the bank’s target within two years. When banks were making their forecasts, the market expected interest rates to rise to 3% in the first half of next year and then fall.
EY economic adviser Martin Beck said in a note to clients that policymakers are likely to raise interest rates more cautiously than the market expected. He added that these energy price hikes would ultimately reduce demand, thereby causing prices to fall.
Banks have used higher interest rates as a key tool to keep inflation in check, but they have also reversed bond purchases, one of the key policies that helped prop up the economy during the pandemic. increase. The bank increased its holdings of British government bonds to 875 billion pounds by December, but stopped reinvesting proceeds from maturing government bonds, shrinking its balance sheet.
Next month, we will take an unprecedented step and begin selling bonds back into the market. If market conditions are right and policymakers vote to start the process, we expect to sell around £10bn of bonds each quarter in the first year.
With economic and price uncertainties so high, banks have emphasized making decisions based on up-to-date data, as other central banks have done recently, and providing hints on the future path of interest rates. It offered very little.
The minutes read that “policies have not followed a pre-set trajectory.”