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Bank of England raises interest rates to highest since 1995

Bank of England raises interest rates to highest since 1995

Despite warning of a long recession ahead, the Bank of England today raised interest rates by the most in 27 years as it races to quell a surge in inflation set to exceed 13%.

The Bank of England’s Monetary Policy Committee voted by 8 votes to 1 to raise the Bank Rate by half a percentage point to 1.75% – its highest level since late 2008 – from 1.25%. The 50 basis point hike was an expected move by economists as central banks around the world struggle to contain rising prices.

The Bank of England warned that Britain faced a recession with output falling by 2.1% peak to trough, similar to a slump in the 1990s, but far less than the COVID-19 shock and the slowdown caused by the 2008-09 global financial crisis. The economy would begin to contract in the last quarter of 2022 and contract throughout 2023, making it the longest recession since the global financial crisis.

Consumer price inflation could peak at 13.3% in October, the highest since 1980, due to higher energy prices caused by the Russia-Ukraine war. Households would thus face two consecutive years of declining disposable income.

Consumer price inflation in Britain reached a 40-year high of 9.4% in June. The BoE had previously forecast that inflation would peak at over 11% and that the British economy would grow almost nothing before 2025. In its new forecasts, the BoE sees inflation falling back to 2% within two years as the economic shock dents demand.

“Monetary policy has no preset course,” the Bank of England said. “The scale, pace and timing of any further change in the Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures,” the Bank concluded.

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