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The Bank of England enacted its largest rate hike for almost 30 years on Thursday, as it bids to cope with inflationary pressures which have ‘intensified significantly’ this summer.
But accelerating inflation is coming at the expense of economic growth, and the central bank expects the UK to enter into recession later this year.
The benchmark bank rate has been increased by half a percentage point to 1.75% from 1.25%. It is the biggest rate rise since 1995. Eight members supported the hike, while Silvana Tenreyro preferred the BoE to extend its streak of smaller 25 basis point rate rises instead.
‘Inflationary pressures in the UK and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPCs previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia's restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term,’ the BoE said.
It has lifted its consumer price inflation outlook to ‘just over 13%’ in the fourth quarter of 2022, compared to its 9.4% forecast in its May report.
Inflation will ‘remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead’.
According to its projections, CPI will only return to the 2% target in the third quarter of 2024.
While inflation is accelerating, economic growth is slowing and gross domestic product will decline. It projects the UK to enter recession ‘from the fourth quarter of this year’.
‘The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the UK and the rest of Europe,’ the BoE added.
On GDP, the BoE expects a 3.5% rise in 2022, lowered from an expected 3.8% rise in its May projection. For 2023, it expects 1.5% decline, having previously forecast just a 0.3% slide. It now expects the economy to shrink by 0.3% in 2024, having previously predicted a 0.3% climb.
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