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Bank of England makes biggest rate hike since 1995 despite forecasting long recession By Reuters – Investing.com

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©Reuters. FILE PHOTO: People outside the Bank of England in the City of London financial district, Britain, January 23, 2022. REUTERS/Henry Nicholls By William Schomberg and David Milliken LONDON, Aug 4 (Reuters) – The Bank of England on Thursday made the biggest interest rate hike in 27 years, despite warning of a long recession looming, as it rushes to stifle a rise in inflation already above 13%. The Monetary Policy Committee of the Bank of England voted by 8 votes in favor and 1 against to introduce a half percentage point rise in the bank interest rate, from 1.25% to 1.75% – its highest level since end of 2008. Most economists in a Reuters poll expected the 50 basis point rise, as central banks around the world struggle to contain rising prices. Silvana Tenreyro, a member of the Monetary Policy Committee, voted alone in favor of a smaller increase of 25 basis points. The Bank of England warned that the United Kingdom was facing a recession with a cumulative drop in GDP of 2.1%, similar to the fall in the 1990s, but much less than the impact of COVID-19 and the slowdown caused by the global financial crisis of 2008-09. The economy would begin to contract in the last quarter of 2022 and would contract throughout all of 2023, making it the longest recession since after the global financial crisis. Consumer price inflation could peak at 13.3% in October, the highest level since 1980, mainly due to the rise in energy prices following the Russian invasion of Ukraine. This scenario leaves households facing two consecutive years of declining disposable income, the biggest cut since records began in 1964. Consumer price inflation in the UK reached its highest level in recent years in June 40 years, 9.4%, more than four times the 2% target set by the Bank of England, which has triggered strikes and put pressure on Boris Johnson’s eventual successor as the next British prime minister to offer more aid . The BoE had previously forecast inflation to peak above 11% and the UK economy to grow almost nowhere near 2025 at the earliest. In its new forecasts, the BoE predicts that inflation will fall back to 2% within two years, as the impact of the economy takes its toll on demand. The British central bank has raised interest rates six times since December, but Thursday’s move was the biggest since 1995. Pressure on Governor Andrew Bailey and his colleagues to act with more extensive measures intensified after the recent large rate hikes by the US Federal Reserve, the European Central Bank and other central banks. These movements weakened the value of the pound, which can increase inflation. The Bank of England repeated that it was prepared to act decisively if necessary to curb the most persistent inflationary pressures. However, he stressed that there are “extremely large” uncertainties about the economy — which could make the slowdown more or less severe than his central forecasts — and that he will judge what his next moves should be as events unfold. “Monetary policy is not on a set course,” the Bank of England said. “The scale, pace and timing of any further changes in bank interest rates will reflect the Committee’s assessment of the economic outlook and inflationary pressures.” Adding to the complex economic outlook, the BoE’s inflation-fighting record has been called into question by Liz Truss, the favorite to be Britain’s next prime minister. Truss wants to establish “a clear direction of travel” for monetary policy and review the BoE’s mandate. The Bank of England said it plans to start selling its huge reserve of government bonds, with active sales of about 10 billion pounds a quarter, soon after its next meeting in mid-September. Gilt holdings peaked at £875bn in December and have since fallen to £844bn after the BoE stopped reinvesting funds from maturing bonds. February (Additional reporting by Andy Bruce; translation by Flora Gómez and Tomás Cobos)

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