EconomyBank of England sees recession approaching and steps up...

Bank of England sees recession approaching and steps up rate hikes

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It runs, it runs, inflation. The Bank of England estimates on Thursday that the country will enter a recession because of galloping inflation. In response to this observation, it announced a hike in its key rates by half a percentage point, a drastic measure. The BoE’s choice to raise its main rate to 1.75%, an increase of 50 basis points, the largest increase since 1995, also risks weighing on the economy by making borrowing more expensive.

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British inflation should, according to the monetary policy report, continue to climb to more than 13% in October, a record since the end of 1980, after having already reached 9.4% over one year in June. What complicates the task of the future Prime Minister, in the midst of the Conservatives’ campaign for the succession of Boris Johnson, who sees the debates monopolized by the acute crisis in the cost of living experienced by the British.

Heavy damage to the economy

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The surge in gas prices since the start of the Russian invasion of Ukraine has led the central bank to predict a painful 75% increase in the ceiling on electricity prices billed to consumers in October. The damage will be heavy for the economy: “We expect a contraction in production every quarter” between the last three months of 2022 and the last three of 2023, warns the Bank of England (BoE).

And “growth after this period will remain very weak”, she adds, with an increase of 3.5% in 2022, but a first contraction in GDP of 1.5% in 2023 and a second of 0.25% in 2024. “I have sympathy for those who wonder why we are raising our rates now and making life more difficult”, assured Andrew Bailey, Governor of the BoE, during a conference. “But the alternative option is worse,” he insisted.

“All options on the table”

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“Our job is to prevent inflation from settling in beyond two or three years,” as it did in the 1970s, adds Ben Broadbent, member of the monetary policy committee. According to the BoE, it is better to act stronger now than to see the monetary policy tightening cycle take hold over time.

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Andrew Bailey indicated that for the upcoming meetings, “all options will be on the table” and that the fight against inflation remained his priority. The BoE is following the example of the US Federal Reserve and the European Central Bank, which chose to raise their rates by 0.75 and 0.50 percentage points respectively in July. The British central bank has indicated that it will also vote, in September, on the possibility of starting to actively sell the bonds it holds as part of its asset purchase program.

Source: 20minutes

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