Raising rates again indicates the risk of a BoE recession and 10% inflation

On December 16, 2021, after the BoE became the first major central bank in the world to raise interest rates following the outbreak of the Corona virus (COVID-19) in London, Britain, a security masked man passed the Bank of England (BoE). REUTERS / Toby Melville

LONDON, May 5 (Reuters) – The Bank of England on Thursday warned that a sharp rise in interest rates since 2009 could have a double impact on Britain’s recession of more than 10% and inflation. Point 1%.

The pound reached its lowest level against the US dollar since mid-2020, below $ 1.24, as the dark nature of the BoE’s new forecast for the world’s fifth largest economy surprised investors.

They have drastically reduced betting on central bank hike rates this year. Revenues from short-term British government bonds fell sharply.

BoE’s nine rates voted 6-3 to raise the banking rate from 0.75%, with Catherine Mann, Jonathan Haskell and Michael Sanders calling for a big increase to 1.25%.

Economists polled by Reuters predict an 8-1 vote would increase borrowing costs by 1%, with one policymaker opposing the rise.

Before Russia’s invasion of Ukraine revolves around energy prices, central banks are scrambling to cope with the rising tide of inflation as the world economy begins to reopen.

The BoE also said it was concerned about the impact of renewed COVID-19 lockdowns in China, which could threaten to hit supply chains again and add to inflationary pressures.

But policymakers around the world are trying to avoid sending their economies into recession.

“This is a very weak forecast, a very sharp recession,” BoE Governor Andrew Bailey told reporters.

“There is a technical definition of a recession that it does not meet – but put it aside – it’s a very sharp recession in the process.”

On Wednesday, the US Federal Reserve raised rates by a half-point to 0.75-1.0%, the largest increase since 2000. Chairman Jay Powell said further such hikes were on the table.

But Powell said the U.S. economy was performing better than Bailey’s bad assessment.

The BoE’s tariff hike is the fourth since December, the fastest pace of policy tightening in 25 years.

Most policymakers said the BoE would “apply some more austerity to monetary policy in the coming months.” It dropped the word “burial” to describe the scale of the rate hikes.

There was a split, with two members saying the guidance was too strong considering the risks to growth.

“The new forecasts, along with increasing divisions among team members, mean that the bank is approaching a halt in its tight cycle,” said James Smith, an ING economist.

Mr Suren, economist head of the British Chambers of Commerce, said the tariff hike and poor outlook would “cause significant concern among families and businesses”.

British consumer price inflation hit a 30-year high of 7% in March, more than three times the BoE’s 2% target, and the central bank revised its forecasts for price growth to show that it has risen above 10% in the past three months. Year.

It was earlier forecast to be 8% in April.

The BoE said British inflation would peak later than other major advanced economies due to the cap on household energy tariffs. Fuel tariffs rose 54% in April and the BoE now sees a further 40% increase in October, hitting the economy.

Real-time post-tax family spending – a measure of living standards – is projected to fall 1.75% this year, the biggest calendar year fall since 2011 and the second-largest since the BoE’s record began in the 1960s.

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Bailey described inflation as “a major concern” for those with “minimal bargaining power, and often those with the lowest bargaining power”.

The BoE has kept its forecast for economic growth at 3.75% this year, but its forecast for 2023 has shrunk by 0.25% from its previous estimate of 1.25% growth. This slows its growth for the year 2024 to 0.25% from the previous 1.0%.

Although growth in the first three months of this year was stronger than the BoE predicted, the economy is expected to stagnate in the second quarter due to additional public holidays and a reduced Govt test. The final quarter will see a nearly 1% drop in GDP when the next energy price hike begins.

Those forecasts are based on betting on financial markets, which will raise BoE rates to 2.5% by the middle of next year, signaling that the central bank may be too high.

Inflation is expected to fall to 1.3% in three years, with market pricing for interest rates, high unemployment and the cost of living crisis hitting the economy. This would be a huge reduction compared to its 2% target after the 2008-09 global financial crisis.

The BoE also said it was working on a plan to begin selling government bonds purchased from the crisis, which currently stands at less than 50 850 billion ($ 1.05 trillion).

BoE staff will update the Monetary Policy Committee on its plan at its August meeting, which will “allow the committee to decide at the next meeting on whether to start selling”.

($ 1 = 80 0.8067)

Additional Report by Andy Bruce William Schomberg Editing Catherine Evans

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