Bank of England raises rates to highest since 1989 even as long recession looms

  • The central bank raises its discount rate to 3% from 2.25%
  • BoE tells investors their bets on rate hikes look too big
  • The British pound falls nearly 2% against the US dollar
  • New forecasts show recession will last until 2024
  • The government is due to present its budget plans on November 17

LONDON, Nov 3 (Reuters) – The Bank of England raised interest rates the most since 1989 on Thursday, but it also warned Britain was facing a long recession and told investors the costs borrowing would likely increase less than expected.

The BoE raised the bank rate from 2.25% to 3%, although it said the UK economy may not grow for two years, a recession longer than during the 2008-09 financial crisis .

The book fell sharply and was down around 2% against the US dollar at 1315 GMT, touching its lowest since mid-October when Britain was in a political crisis triggered by the government’s tax cut plans former Prime Minister Liz Truss.

On Wednesday, the US Federal Reserve also raised rates by 75 basis points, but signaled that US borrowing costs would likely rise more than expected to crush inflation.

This contrasts with the message from the BoE on Thursday.

“We cannot make any promises about future interest rates, but given our current situation, we believe the Bank Rate will need to rise by less than the current price in financial markets,” the governor said. . Andrew Bailey said, in an unusually direct message.

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The BoE said it now expects inflation to hit a 40-year high of around 11% in the current quarter. But he also thinks the economy has entered a recession which could mean it contracts in 2023 and 2024 and contracts by 2.9% in total.

Unemployment would rise steadily to 6.4% by the end of 2025, almost doubling from the current 3.5%, its lowest rate since the mid-1970s.

Thursday’s rise in borrowing costs – the largest in 33 years, barring a failed attempt to support the pound on Black Wednesday in 1992 – was in line with economists’ expectations in a Reuters poll, but did not was not unanimous.

Two policymakers, Silvana Tenreyro and Swati Dhingra, voted for smaller increases of a quarter and half a percentage point respectively.

The majority of the nine-member monetary policy committee said rates are likely to rise further, but probably not as high as the 5.2% that was priced into financial markets when the BoE finalized its forecast.

“Further increases in the Bank Rate may be needed for inflation to return sustainably to target, albeit at a lower peak than financial markets have been pricing in,” the BoE said, offering uncharacteristically guidance. specific to investors.

Earlier Thursday, markets expected the Bank Rate to peak at around 4.75%. After its announcement, that peak had fallen to less than 4.7% by September next year.

“The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, if necessary,” the MPC added, echoing its previous guidance.

TURMOIL IN GREAT BRITAIN

Central banks in the Western world are responding to similar challenges. Inflation has soared over the past year due to residual labor shortages and supply chain bottlenecks since the COVID pandemic and – in the case of Europe – of a sharp increase in energy bills since Russia invaded Ukraine in February.

Britain’s new finance minister, Jeremy Hunt, said ‘the government’s number one priority is getting inflation under control, and today the Bank has taken action in line with its aim of bringing inflation back to target’ .

The BoE has faced weeks of political and financial chaos since its last rate hike on Sept. 22.

Just a day later, then-Prime Minister Truss’ government launched a £45billion ($52billion) unfunded tax cut package that received a damning response from investors who have pushed the pound to a record high against the dollar and forced the BoE to prop up the bond market to help pension funds.

Truss had to resign after 44 days in office.

Markets are now more stable, with UK government borrowing costs broadly back to pre-turmoil levels. On Tuesday, the BoE was able to start selling bonds from its 838 billion pound quantitative easing stockpile.

BoE policy-making is made particularly tricky by a lack of clarity on future government policy.

While most of Truss’ tax cuts have been rolled back, new Prime Minister Rishi Sunak has signaled that there will be government spending cuts and potentially higher taxes, the extent of which will not become clear until a budget statement on November 17.

(This story has been corrected to change usually to unusually in paragraph 6)

Written by David Milliken and William Schomberg; Editing by Catherine Evans

Our standards: The Thomson Reuters Trust Principles.

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