The Bank of England continued its fight against inflation on Thursday, raising interest rates for the sixth straight meeting, this time by 0.5 percentage points. This was his biggest rise since 1995. The central bank also revised its outlook for the UK economy, predicting higher inflation and warning that a prolonged recession could begin later this year.
Inflation will be higher than previously forecast.
Price pressures have “increased significantly” since the bank’s last quarterly monetary policy report in May. At the time, the bank predicted that inflation would peak at just over 10% in the fourth quarter. A new forecast sees a peak of 13% from October to December, with inflation “remaining at very high levels through much of 2023.”
Cuts in gas supplies by Russia remain the main driver of inflation.
The bank said “the risk of Russia’s restrictions on gas supplies to Europe and further restraint” has caused a “near doubling of wholesale gas prices since May”, which explains most of the inflation overshoot. doing. The bank said there was a risk that price and wage pressures at home would become “more sustained” due to global energy prices and pandemic-related supply chain disruptions.
A recession may come.
The bank said the outlook could be “significantly worse” as economic growth in the UK has slowed and the recent surge in natural gas prices has put pressure on household budgets. The bank expects the UK to slip into recession in the last quarter of the year and last until the end of 2023. The bank predicted that the economy would contract by 1.5% next year, far worse than the 0.25% contraction he predicted earlier. .
Income will experience its worst squeeze on record.
Adjusted for inflation and taxes, household income is projected to fall sharply this year and next. In 2022, this measure of income will see him fall by 2.5% and by 2023 by another 1.25%, the worst on record dating back to the 1960s.
Wage growth, while at an all-time high, has not kept up with inflation. Millions of households are expected to feel more pressure in October when he predicts that household energy bill caps will be raised to £3,500 (about $4,240), three times what he did last year. increase.
The bank is likely to begin selling its holdings of government bonds next month.
Banks are raising interest rates to combat inflation, but they are backing off bond purchases, one of the key policies that propped up the economy during the pandemic. By December he had increased his holdings of UK government bonds to £875bn, but since then he has stopped reinvesting proceeds from maturing bonds and allowed stocks of assets. to shrink.
The bank plans to start selling bonds back to the market next month. We expect to sell around £10bn of bonds per quarter in the first year.
