The Bank of England raised its rate and considered the economy to be in recession

which was published on Thursday, September 22, 2022 at 6:05 pm

The Bank of England announced on Thursday a marked increase in its key rate to try to curb inflation, less sudden than the one adopted the previous day by the American Federal Reserve (Fed), while the British economy should enter to shrink from the third trimester.

The Monetary Policy Committee (MPC) is divided: out of nine members, “five voted for an increase of 0.50 points” to 2.25%, explained the BoE in a press release, bringing the rate to a peak since 2008.

The Bank also estimates that UK inflation will rise in October to below 11% year-on-year, against the 13% forecast so far.

The MPC division in the United Kingdom reflects the doubts of central bankers around the world: they are struggling to fight against inflation, especially due to the rise in energy prices since the start of the war in Ukraine, but assessment risk. already hampered global economic activity by making borrowing more expensive.

In the last 24 hours, in addition to the Fed, the Swiss Central Bank raised its rates by 0.75 points, while the Bank of Norway, like the BoE, contented itself with an increase of 0.5 points.

Japan’s monetary institution has meanwhile continued its ultra-flexible monetary policy, although the government has announced that it will intervene in the foreign exchange market to support the yen.

– Political uncertainty –

In the UK, uncertainty is high due to budget announcements expected on Friday from the new government of Conservative Prime Minister Liz Truss.

The BoE warned that after the presentation of the “mini-budget” on Friday, it is necessary to study the measures announced in detail in order to decide on the next actions on rates.

The flagship measure so far is to freeze electricity bills for two years for individuals, and support almost half of energy costs for businesses.

This led the Bank of England to reduce its inflation forecast.

However, it should remain above 10% for several months before falling, predicts the BoE.

– Recession of Britain –

MPC members who want to see the BoE follow in the footsteps of the Fed and the Swiss National Bank with a 0.75 basis point hike admitted that the energy price ceiling would moderate inflation in the short term and help homes.

They fear, however, that this will stimulate consumer spending and therefore higher prices in the longer term.

“Raising rates faster now will help bring inflation back to its medium-term goal, and reduce the risk of a longer and more expensive cycle” of hikes, they defended according to minutes published Thursday. in their standby meeting.

Economists such as Ian Stewart, an analyst at Deloitte, believe that the British central bank is far from ending monetary tightening.

“We expect rates to double again before the middle of next year, which will curb lending and weigh on an already stretched economy,” said Ian Stewart, analyst at Deloitte.

And economic activity in the UK is already struggling, as the BoE has indicated that the UK has entered recession: “Bank staff now expect a 0.1% decline in GDP in the third quarter, a second consecutive quarters of decline This is the generally accepted definition of a recession.

By raising its rates as the government tries to revive the economy, the BoE could also exacerbate its dispute with the executive.

During her campaign to replace Boris Johnson, Ms Truss criticized the BoE, accusing it of not acting quickly and promising to review its situation.

The pound rose 0.03% to 1.1273 dollars at around 3:55 pm GMT (5:55 pm in Paris) but struggled to move away from the lowest since 1985 hit at the start of the session, at 1.1212 dollars, after the decision. from Fed.

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