London
CNN Business
—
The bank of england raised interest rates by three-quarters of a percentage point on Thursday, the biggest rise in 33 years, as it tries to contain galloping inflation even as the British economy slipping into a recession it could last two years.
The central bank made its eighth interest rate hike in less than a year, taking its benchmark rate to 3%, the highest since November 2008.
The enormous hike corresponds to the movements carried out by the The US Federal Reserve on Wednesday and the European Central Bank last week.
“Inflation is too high, and it’s the bank’s job to bring it down,” Governor Andrew Bailey said at a news conference after the announcement. “If we don’t act forcefully now, it will be worse later.”
As the Bank of England raises borrowing costs to limit rising prices, the UK economy is set to suffer.
The central bank believes economic output is already contracting, and its latest projection is that the recession will continue through the first half of 2024 “as high energy prices and significantly tighter financial conditions weigh on spending.” .
Compared to previous recessions in the UK, gross domestic product is expected to remain low compared to pre-recession levels for a “prolonged” period, Bailey said.
A two-year recession would be longer than that following the 2008 global financial crisis, although the Bank of England has said any decline in GDP heading into 2024 is likely to be relatively small.
The pound fell sharply after the announcement, losing 2% against the US dollar to $1.117. It also fell 1.2% against the euro.
Since the last Bank of England meeting, UK financial markets have gone through a period of unprecedented turbulence and the outlook for the economy has deteriorated.
Former Prime Minister Liz Truss’ ‘mini’ budget at the end of September – with her promise of £45bn ($51.6bn) in unfunded tax cuts – crushed the poundbond prices crashed, triggered chaos in mortgage markets and sparked a emergency response by the Bank of England to rescue struggling pension funds.
While Truss’ tax cut plans have since been widely abandoned, restoring calm to markets and dampening medium-term inflation expectations, rising food and energy prices are keeping prices high. The annual inflation rate rose to 10.1% in September from 9.9% in August, returning to a 40-year high in July.
Bailey acknowledged the “difficult road to travel”.
The central bank does not expect inflation to start falling until next year. This will require more interest rate hikes in the coming months, although Bailey said market expectations appeared too aggressive.
The remarks contrasted with Wednesday’s remarks from Fed Chairman Jerome Powell, who said rates may need to rise more than expected.
Central bank policy makers now awaiting the government’s budget announcement on November 17 for more details on spending plans and fiscal policies, which could influence what happens to inflation next year.
Despite recent turmoil in the bond market, the Bank of England this week pushed ahead with its plan to shrink its balance sheet, selling £750 million ($859 million) of short-term government debt on Tuesday. In a sign of renewed confidence in the UK, investors placed around £2.45 billion ($2.8 billion) in bids for the bonds, Reuters reported.