The Bank of England raised interest rates by 0.5 per cent on Thursday. This was his biggest rise since 1995. Policy makers have stepped up their fight against inflation despite warnings that the UK could enter a prolonged recession later this year.
The bank raised interest rates from 1.25% to 1.75% as it expects annual inflation to exceed 13% when household energy bills jump in October. This is his highest since 2008. This is the highest inflation rate in 42 years.
The bank said much of the price spike was still driven by global energy markets. In the last three months, wholesale natural gas prices have nearly doubled. This is expected to push home energy bills capped at £3,500 (about $4,260) in the fall. That’s three times his bill from a year ago.
The outlook for millions of households is grim. Adjusted for inflation and taxes, incomes are projected to fall sharply this year and next, the worst on record since the 1960s.
The UK is expected to enter recession in the fourth quarter of this year and last until the end of 2023, the bank predicts.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
“The recent rise in gas prices has further significantly weakened the outlook for activity” in the UK and other European countries, according to the minutes of this week’s meeting, policymakers said. The UK is “currently projected to enter a recession”.
Thursday’s rate change was the sixth rise since December as banks try to tackle inflation running at its fastest pace in 40 years. As inflationary pressures persist and other major central banks also take more aggressive action to halt price increases, they are forced to raise interest rates by more than their usual 0.5 percentage points.
In the UK, consumer prices rose 9.4% year-on-year in June, faster than inflation in the US and the Eurozone. The Federal Reserve recently raised interest rates by three-quarters of a percentage point, and the European Central Bank last month raised interest rates by half a percentage point for the first time in over a decade.
Policy makers say they are committed to keeping inflation down to the banks’ 2% target, but the risks of a worsening economic slowdown have increased.
The National Institute of Economic and Social Research, a London-based think tank, said Wednesday that the economy will enter a recession this quarter, losing 1% of its gross domestic product over three quarters.
“We’re really in stagflation here,” Stephen Millard, deputy director of the Institute, said before the bank’s decision. Household incomes are being squeezed as wage growth has not kept pace with rising prices as high inflation faces a recession. Research institutes are calling for more government support for low-income households as food prices continue to rise and households are shrinking. Utility costs In the fall it probably jumps as much as 75%.
The Bank of England’s own forecast is even more pessimistic. It predicted that the economy would contract by 1.5% next year. This shows the scale of the economic challenges facing his two Conservative MPs, who are vying for the role of party leader and prime minister. Much of the debate so far has centered on taxes, and current frontrunner Liz Truss has vowed to cut taxes quickly for workers and businesses amid a cost-of-living crisis. .
