UK ‘in recession’ as Bank of England hikes interest rates to 14-year high
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The Bank of England has announced it will hike interest rates to their highest level since 2008 and indicated that it believes the economy is already in recession.
The central bank had previously projected the economy would grow in the current financial quarter, but said it now believes gross domestic product (GDP) will fall by 0.1 per cent. This comes after a reported 0.2 per cent fall in GDP in the second quarter, meaning that the economy is now in recession. A recession is when GDP shrinks for two consecutive quarters.
The Bank’s Monetary Policy Committee (MPC) decided to raise rates to 2.25 per cent – their highest since November 2008 – from 1.75 per cent, in an effort to grapple big increases in the cost of living.
In committee minutes, it said the “tight labour with wage growth and domestic inflation” above targets called for a “forceful response”.
Nevertheless, the hike was below the expectations of the financial markets, who had predicted a 0.75 percentage point hike in line with the rate increase announced by US Federal Reserve on Wednesday.
The MPC came to the decision after five members of the nine-strong board voted for the 0.5 percentage point increase, including governor of the Bank Andrew Bailey.
Three members – Jonathan Haskel, Catherine Mann and Dave Ramsden – voted in favour of a 0.75 percentage point rise, while one member – Swati Dhingra – called for a 0.25 percentage point increase.
The decision to lift rates is a bid to keep inflation under control. It is the best tool that the Bank of England has to steer inflation – currently at 9.9 per cent – back to its 2 per cent target.
In the September meeting, the MPC also said inflation is now not expected to soar as high as had been expected previously, following the government's announcement of plans to freeze energy prices for households earlier this month.
Consumer Price Index (CPI) inflation is now set to peak at “just under 11 per cent” in October. This would mark the highest inflation the UK has witnessed since January 1982.
In its previous meeting in August, the Bank of England warned that inflation was likely to peak at 13.3 per cent and the country would witness five consecutive quarters of recession.
However, the Bank’s MPC has witnessed a hectic political period in the seven weeks since last meeting, which has seen Liz Truss appointed Prime Minister and her new government reveal its energy support for consumers and businesses.
The newly appointed chancellor of the exchequer, Kwasi Kwarteng, is also due to announce new fiscal measures, dubbed the Growth Plan, on Friday. The Bank said it will consider the impact of this plan at its next MPC meeting.
The Bank also voted unanimously to reduce quantitative easing by £80bn over the next 12 months to £758bn. The MPC was originally set to announce its decision on Thursday 15 September, but delayed this for a week due to the Queen’s death.
Downing Street declined to comment on the Bank of England’s decision to raise the interest base rate. A Number 10 spokeswoman said: “That is obviously a matter for the independent Bank of England. I would point you to the support that we’ve set out to help people with the cost of living, which we know is a concern for families and businesses across the country.”
Shadow chancellor Rachel Reeves said the rate rise “shows how this Tory government has lost control of the economy”.
Reeves added: “Their failure to foot any of their energy package with a windfall tax on the enormous profits of oil and gas producers is creating dangerous uncertainty.
“Their choice to put such huge unfunded and uncosted sums on borrowing will leave British taxpayers paying for years and are pushing up mortgage costs for everyone. The Tories’ reckless approach is an immense risk to family finances.”
Liberal Democrat Treasury spokeswoman Sarah Olney said the interest rate rise would be a “hammer blow to struggling homeowners who are being punished by the government’s failure to control inflation”.
She continued: “This monster rate rise could have been avoided if Conservative ministers bothered to take action sooner on energy bills and the rising cost of living. Instead, the Bank of England is left with no choice but to hike mortgage costs for millions.”
Olney said that Liz Truss should “bail out families and pensioners who will suffer as a result of this mortgage hike”.
The British Chambers of Commerce (BCC) said the Bank of England faces a “balancing act” in trying to keep inflation under control.
David Bharier, the BCC's head of research, said: “The decision by the Bank of England to raise the base rate to 2.25 per cent is further evidence they are taking a hard line on tackling inflation. Our research shows that unrelenting inflation, largely driven by rising energy costs, is by far and away the top business concern at present.
“But the Bank faces an increasingly tricky balancing act. The interest rate is a very blunt instrument to control inflationary pressures that are largely driven by rocketing energy costs and global supply chain disruption.
“The Bank’s decision to raise rates will increase the risk for individuals and organisations exposed to debt burdens and rising mortgage costs – dampening consumer confidence.”
He said that businesses want a “plan to address the short-term drivers of inflation as well as a long-term strategy to promote investment”.
The pound fell after the Bank of England announced the interest rate increase, although it rallied later in the morning.
Earlier this month, the European Commission outlined its five-point plan to address the energy price crisis for EU member states, which includes windfall taxes on the gargantuan profits of fossil fuel companies, mandatory electricity savings and a cap on the price of Russian gas.
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