UK central bank predicts lengthy recession, hikes rates by most since 1995

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(Getty Images)
(Getty Images)

Britain will sink into a lengthy recession later this year as inflation rockets even higher, the Bank of England forecast Thursday as it unveiled the biggest interest rate hike since 1995.

The BoE's Monetary Policy Committee voted 8-1 to lift its key rate by 0.50 percentage points to 1.75 percent, it said in a statement, making borrowing more expensive during a cost-of-living crisis.

Most policymakers felt that a "more forceful policy action was justified" than in previous meetings to combat rampant inflation fuelled by rocketing domestic energy bills.

Inflation 'intensifying'

UK inflation was predicted to peak this year at just over 13 percent, reaching the highest level since 1980.

"Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly" since May, the BoE said.

"That largely reflects a near-doubling in wholesale gas prices since May, owing to Russia's restriction of gas supplies to Europe and the risk of further curbs.

"As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term."

As a result, the BoE anticipated the UK economy would enter a painful recession that will last until late 2023.

UK inflation had already jumped to a four-decade high of 9.4 percent in June.

"The latest rise in gas prices has led to another significant deterioration in the outlook for (economic) activity in the United Kingdom and the rest of Europe," the BoE added Thursday.

"The United Kingdom is now projected to enter recession from the fourth quarter of this year."

The recession will however be shallower than the 2008 crash that followed the global financial crisis.

The UK economy is expected to shrink by up to 2.1 percent in size from its highest point, according to the forecast.

The BoE rate hike met expectations but the British pound sank 0.7 percent versus the euro and dollar as dealers fretted over the gloomy outlook.

The BoE move mirrors aggressive monetary policy from the US Federal Reserve and the European Central Bank last month, as the world races to cool red-hot inflation that has been fuelled by Russia's invasion of Ukraine.

Consumer prices have also rocketed on supply-chain strains as demand rebounds on the easing of Covid restrictions.

The BoE's chief task is to keep inflation close to a target of 2.0 percent.

Added to the picture, UK energy regulator Ofgem is due to ramp up domestic electricity and gas prices again in October, just ahead of the colder northern hemisphere winter.

The BoE said Thursday that the typical UK household energy bill will leap to 3 500 pounds (R71 000) per year as a result.

Separately, Ofgem warned Thursday that Britons face a "very challenging winter ahead", adding its energy price cap will now be reviewed every quarter instead of every six months.

The nation's cost-of-living crisis has so far dominated the race to become Britain's next prime minister.

Liz Truss is ahead in the polls against fellow Conservative and former finance minister Rishi Sunak, who was first to respond to Thursday's gloomy BoE news.

"One of the most urgent challenges we face as a country is getting inflation under control as quickly as possible," Sunak tweeted.

"As prime minister I would prioritise gripping inflation, growing the economy and then cutting taxes."

Truss has pledged to start cutting taxes from day one with an emergency budget.

"Today's (BoE) news underlines the need for the bold economic plan that I am advocating. We need to take immediate action to deal with the cost of living crisis, grow the economy and delivering as much support to people as possible," she said.

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