(CTN News) – The Bank of England increased interest rates on Thursday by three-quarters of a percentage point, the largest increase in 33 years, to rein in spiralling inflation as the UK economy heads into a two-year recession.
The central bank increased its benchmark rate for the seventh time in less than a year to 3%, the highest level since November 2008.
The significant increase is in line with decisions taken by the European Central Bank last week and the US Federal Reserve on Wednesday.
At a news conference after the decision, Governor Andrew Bailey said that “inflation is too high, and it’s the bank’s role to drive it down.” “Things will worsen if we don’t act decisively now.”
Britain’s economy is anticipated to suffer if the Bank of England increases borrowing rates to rein in price increases.
According to the central bank’s most recent forecast, the recession will last until the first half of 2024 “as rising energy costs and considerably tighter financial conditions weigh on consumption.” The bank thinks that economic production is already declining.
Gross domestic product is anticipated to remain sluggish relative to pre-recession levels for a “prolonged” time, according to previous UK recessions, Bailey added.
Even though the Bank of England said that any GDP reductions going into 2024 would probably be relatively mild, a two-year recession would be longer than the one that followed the 2008 global financial crisis.
With its promise of £45 billion ($51.6 billion) in unfunded tax cuts, former prime minister Liz Truss‘ “mini” budget from late September caused the pound to crash, bond prices to plummet, chaos to erupt in the mortgage market, and the Bank of England to act in an emergency to save frail pension funds.
Rising food and energy costs keep prices high, even though most of Truss’ tax-cutting proposals have already been abandoned, bringing calm to the markets and lowering expectations for inflation in the long term. From 9.9% in August to 10.1% in September, the annual inflation rate increased, reverting to the 40-year peak in July.
Bailey admitted that there was a “difficult path ahead.”
The central bank projects that inflation won’t decline until the following year. More interest rate increases would be necessary to achieve that in the next months, while Bailey said market forecasts looked too optimistic.
In contrast, Fed Chair Jerome Powell suggested on Wednesday that rates may need to increase more than anticipated.
For further information on the government’s spending and taxing intentions, which might affect inflation next year, central bank officials are awaiting the budget declaration on November 17.
The Bank of England continued this week with efforts to reduce its balance sheet, selling £750 million ($859 million) of short-term government notes on Tuesday despite recent instability in the bond market.
According to NYTimes, investors put bids for the bonds totalling approximately £2.45 billion ($2.8 billion), demonstrating a resurgence of confidence in the UK.
Following the statement, the British pound dropped significantly, falling 2% to $1.117 versus the US dollar. Additionally, it fell 1.2% versus the euro.
The UK financial markets have seen extraordinary turmoil since the Bank of England’s previous meeting, and the economy’s prognosis has worsened.
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