By | August 4, 2022

Bank of England raises interest rates by 0.5 percentage points to 1.75 percent

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Britain is facing a prolonged recession, and is facing the biggest cut in living standards in over 60 years according to the Bank of England warned on Thursday, after it raised interest rates dramatically and predicted that inflation to reach 13 percent by the end of this year. Eight of the nine Monetary policy committee members voted to increase prices in the range of 0.5 percent to 1.75 percent, which is the largest rise in 27 years. The BoE’s action follows similarly aggressive actions of The European Central Bank and US Federal Reserve in the face of rising inflation. However, its predictions indicate that Britain has a less promising economic outlook than the US or the eurozone as households are both more susceptible to the shocks in energy prices as compared to the US and are less protected by the measures of government as compared to the eurozone. The BoE stated that due to the recent rise in the cost of gas, triggered by disruptions in supply caused by Russia’s incursion in Ukraine and the Ukraine war, it is now expecting inflation to exceed 13 percent by the end of the yearfar higher than the May projection of. It is expected to continue to rise in “very elevated levels” throughout 2023, before falling back to the 2 percent rate within two years. “The Russian shock is now the biggest contributor to UK inflation. There’s a cost economic of the conflict. However, it won’t deter our decision to set an monetary policy that brings inflation back to 2 percent goal,” Andrew Bailey, BoE governor, stated following the announcement. The pound fell up to 0.6 percent to $1.207 following the announcement and the yield of the 10-year UK government bonds dropped 0.09 percent to 1.83 percent. The BoE is coming under increasing pressure from politicians to curb inflation following the announcement by Foreign Secretary Liz Truss said she would be looking to alter its mission in the event that she wins the Tory leadership race and is elected UK the prime minister. As wages rise at approximately 50% of the rate of inflation, BoE forecasts showed that households’ income after tax will decrease in real terms in 2022 and 2023 regardless of the fiscal aid that the government announced in May. The decline from peak to trough of over 5 per percent in income for households will be the highest in history with data dating back to the 1960s.

 

Even as households were dipping into their savings, spending by consumers was expected to decline in the coming year, according to the BoE which is reducing the growth of the economy. The forecasts indicated a more severe contraction in the gross domestic product than the one it had predicted in May and the economy slipping into receding in 2022’s fourth quarter, and continuing to shrink over five quarters. The decline from peak to bottom of 2.1 percent is similar to the one experienced in the early 1990s. The BoE stated that, even after the economy had emerged from recession, it would expect growth to remain “very weak by historical standards”. The BoE’s forecast for the central period is based on the market’s anticipations of interest rates increasing to 3 percent in the coming year, shows inflation remains at double digits through the 3rd quarter in 2023 however, it would fall back towards the bank’s 2-per cent goal a year later. If the BoE decided to not take additional policy actions as it forecasts, the that inflation will still be to below 2 percent until 2024’s end. Rishi Sunak, the former chancellor, said that the forecasted rise in inflation that exceeds 13 percent reinforced the argument that his Tory opposition leader Truss is reckless to increase borrowing and reduce taxes in the current. “The bank has acted today and it is imperative that any future government grips inflation, not exacerbates it,” Sunak declared. “Increasing borrowing will put upward pressure on interest rates, which will mean increased payments on people’s mortgages.” Sunak’s team claimed that the 0.5 percentage point increase in interest rates will cause the Treasury more than PS6bn in expenses for servicing the debt. Truss has said that Sunak is partially responsible for the trend of Britain into recession because of the series of tax increases he introduced as chancellor.

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