A man wearing a face mask walks past the Bank of England (BoE) after the BoE became the world’s first major central bank to raise interest rates since the coronavirus pandemic (COVID-19) pandemic in London, UK, December 16, 2021. Reuters / Toby Melville
Register now for FREE unlimited access to Reuters.com
I’m registering
- The central bank expects the economy to shrink in 2023
- BoE raises bank interest rate to 1.0% from 0.75%
- Determining rates are divided on the next moves
- The BoE must balance rapid inflation with concerns about a slowdown
- The MPC will consider a plan to sell gold in August
LONDON, May 5 (Reuters) – The Bank of England has issued a strong warning that Britain risks a double blow from recession and inflation of more than 10%, as on Thursday raised interest rates to their highest since 2009, increasing by a quarter point up to 1%.
The pound fell more than a cent against the US dollar to reach its lowest level since mid-2020, below $ 1.24 as investors reacted to gloomier economic forecasts.
They also cut central bank interest rate betting aggressively this year. Yields on short-term British government bonds fell sharply.
Register now for FREE unlimited access to Reuters.com
I’m registering
The nine BoE interest rates voted 6-3 for a 0.75% increase in bank interest rates, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a larger increase to 1.25%.
Economists polled by Reuters predicted stronger 8-1 votes to raise the benchmark for borrowing costs to 1%, with one politician opposing the increase.
Central banks are struggling to cope with the surge in inflation, which they described as a transitional one, when it began with the recovery of the global economy after the pandemic, before Russia’s invasion of Ukraine led to a spiraling rise in energy prices.
BoE said it was also concerned about the impact of renewed COVID-19 blockades in China, which threaten to hit supply chains again and lead to inflationary pressures.
But politicians around the world are also trying to avoid sending their economies into decline.
“The point is that we are now on this very narrow path,” Bailey told reporters.
On Wednesday, the US Federal Reserve raised interest rates by half a percentage point to a range of 0.75-1.0%, its biggest increase since 2000. President Jay Powell said further increases of 50 basis points were expected.
The BoE move is its fourth consecutive rate hike since December, the fastest in 25 years.
The BoE said most politicians believe that “some degree of further tightening of monetary policy may still be appropriate in the coming months”. It dropped the word “modest” to describe the scale of the forthcoming interest rate hikes.
A split has emerged, with two members saying the guidelines are too strong given the risks to growth.
Business groups expressed concern about the move on Thursday.
“The decision to raise interest rates will cause serious concern among households and businesses, given the rapidly deteriorating economic outlook and growing pressure on spending,” said Suren Thiroux, head of economics at the British Chambers of Commerce.
Britain’s consumer price inflation peaked at a 30-year high of 7% in March, more than tripled the 2% BoE target, and the central bank revised its price growth forecasts to show that it peaked above 10% in March. the last three months of this year.
It had previously forecast a peak of about 8% in April.
The BoE said British inflation would peak later than in other major developed economies due to a cap on energy tariffs for households. Fuel bills jumped 54% in April, and BoE now sees another 40% increase in October, hitting the economy.
Household real disposable income after tax – a measure of living standards – is expected to fall 1.75% this year, the biggest drop in the calendar year since 2011 and the second largest of BoE records in 60 -the years of the last century.
Voters in local elections on Thursday are expected to punish Prime Minister Boris Johnson for the cost of living crisis and for violating his own rules for blocking COVID. Read more
The BoE maintained its forecast for economic growth this year at 3.75%, but lowered its forecast for 2023 to show a contraction of 0.25% compared to a previous estimate of 1.25% growth. It lowered its growth forecast for 2024 to 0.25% from the previous 1.0%.
While growth in the first three months of this year was stronger than BoE forecasts, it expects the economy to stagnate in the second quarter due to an additional public holiday and reduced COVID tests. GDP has fallen by almost 1% in the last quarter, when the next rise in energy prices begins.
These forecasts are based on bets on financial markets that the BoE will raise interest rates to about 2.5% by the middle of next year, which the central bank has signaled is probably too much.
He said he expects inflation to fall to 1.3% in three years, based on market interest rates, as higher unemployment and lower living costs hit the economy. This would be the biggest underestimation of the 2% target of the global financial crisis in 2008-2009.
The BoE also said it would work on a plan to start selling government bonds it bought after the crisis, which currently stand at just under £ 850 billion ($ 1.05 trillion).
BoE staff will update the Monetary Policy Committee on its plan for its August meeting, which will “allow the committee to decide at the next meeting whether to launch sales”.
(1 dollar = 0.8067 pounds)
Register now for FREE unlimited access to Reuters.com
I’m registering
Additional reports by Andy Bruce Written by William Schomberg Edited by Catherine Evans
Our standards: Thomson Reuters’ principles of trust.
Add Comment