The Bank of England delivered a 50-basis-point increase in interest rates on Thursday, as well as a warning that the U.K. is set to enter a recession starting in the fourth quarter.
The rise in interest rates, to 1.75%, was in line with market expectations, money managers said. The bank’s monetary policy committee, which sets rates to meet its 2% inflation target, voted 8-1 to raise rates by 50 basis points. One member of the committee voted to raise rates by 25 basis points, to 1.5%.
The move came as inflationary pressures in the U.K. and rest of Europe have intensified, largely reflecting increased gas prices as a result of Russia’s continued restriction of gas supplies to Europe, the bank said in a news release outlining its decision.
U.K. consumer price index inflation is expected to rise to just more than 13% in the fourth quarter, from 9.4% in June. It is projected to remain high through much of 2023 before falling to the 2% target.
The bank highlighted slowing GDP growth in the U.K., with the latest rise in gas prices leading to “another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe,” the bank said. The U.K. is now projected to enter a recession starting in the fourth quarter, with real household post-tax income expected to fall sharply this year and in 2023. Consumption growth is also expected to turn negative.
The 50-basis-point hike is the largest in 27 years and “the minimum action required by the Bank of England at this stage,” said Seema Shah, chief strategist at Principal Global Investors, in an emailed comment. “With inflation set to hit 13% later this year and set to remain stubbornly high through next year, the central bank needs to tighten policy at an accelerated pace.”
Ms. Shah warned that policy tightening will “inevitably take its toll on the U.K. economy. Higher mortgage payments and borrowing costs will only add to the awful cost-of-living crisis, straining household budgets in a way we haven’t witnessed for over 60 years and plunging the U.K. into recession later this year. If nothing else, the Bank of England should be applauded for its realistic economic forecast. If only other central banks could be so realistic,” she said.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said in a separate emailed comment that the BOE’s decision “confirms the notion of a central bank determined to crush inflation in the face of ongoing supply-side challenges, including a very tight labour market and soaring energy bills.”
The bank also said its MPC “is provisionally minded” to begin selling off U.K. government bonds — known as gilts — held in its asset purchase facility shortly after its September meeting, subject to economic and market conditions and a confirmatory vote at that meeting. The meeting is set to take place Sept. 14, with the decision announced the following day. As of Aug. 3, the total holdings in the asset purchase facility was £863 billion ($1.05 trillion), comprising £844 billion in gilt purchases and the reminder in sterling non-financial investment-grade corporate bond purchases.
