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Britain is facing a protracted recession and the worst decline in living standards in six decades. This was announced on Thursday by the Bank of England, which sharply raised interest rates and made a forecast of a 13% rise in inflation by the end of the year.
Eight out of nine members of the Bank’s Monetary Policy Committee voted to raise interest rates by 0.5 percentage points to 1.75 percent. This is the largest increase in the last 27 years.
Prior to this, decisive steps in the same direction were taken by the European Central Bank and the US Federal Reserve, which did this due to sharply increased inflation. Outside committee member Silvano Tenreyro voted against the majority, proposing a 0.25 percentage point hike.
The Bank of England said that due to recent increases in gas prices, inflation at the end of the year could exceed 13%, which is much more than forecasts in May, and remain at a “very high level” all of 2023, after which it is possible to decrease in two years up to two percent.
When the news broke, the pound fell 0.4% to $1.209. And the yield on ten-year government bonds fell by 0.07 percentage points to 1.85%.
The Bank of England is under increasing political pressure. He is being asked to fight inflation after Foreign Secretary Liz Truss said she would change banking powers if she wins the election and becomes Britain’s prime minister.
With wages growing at twice the rate of inflation, BoE forecasts indicate that household income after taxes in real terms will decline in both 2022 and 2023, even with the bailout announced by the government in May.
Even taking into account the spending of family savings, consumer spending will decline next year, which will lead to a slowdown in economic growth, the British Central Bank said. His forecasts show a more serious decline in GDP compared to May estimates. In the fourth quarter of 2022, the economy will enter a recession and will contract for five consecutive quarters.
A 2.1% decline in GDP would be comparable to what happened in the early 1990s. The Bank of England said that even when the recession in the economy stops, the expected growth “will be very weak by historical standards.”
The Bank of England’s Monetary Policy Committee noted that the exchange rate could fluctuate and suggested that a 50 basis point rate hike would not necessarily be one of many increases.
The bank’s main forecast is based on market expectations of a 3% increase in interest rates next year. It shows that inflation in the third quarter of 2023 will still be in double digits, but will drop to two percent a year later, which is the central bank’s target. Unless the Bank of England takes further action, inflation by the end of 2024 is still projected to be below 2 percent.
The Bank of England said the uncertainty in its central forecast (which assumes that energy prices will be in line with market expectations for the next six months but remain unchanged thereafter) is “extremely large.” However, the published alternative scenarios still show “very high inflation in the near term, a contraction in GDP next year and a marked decline in inflation thereafter.”
Former Treasury Secretary Rishi Sunak said the projected jump in inflation above 13% supported claims that his rival for the Conservative Party leadership, Truss, would be irresponsible if she borrowed more and cut taxes.
“The bank made a decision today, and it’s critical that the next government fights inflation, not exacerbates it,” he said.
Sunak’s team notes that a 0.5 percentage point hike in interest rates would cost the Treasury £6bn, because that’s what the rise in loan servicing costs will cost.
Truss claims Sunak is partly responsible for pushing Britain into recession because he repeatedly pushed for higher taxes as finance minister.
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