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The Bank of England enacted another 50 basis point rate hike on Thursday, as it warned that inflation will be above 10% ‘over the following few months’ and that the UK could enter a recession this quarter.
The half percentage point rise took bank rate to 2.25% from 1.75%. It was the second successive 50 basis point hike by Threadneedle Street and is the joint-largest rate rise since 1995.
The Monetary Policy Committee was somewhat divided, however. Five members backed a 50bp hike, though three members, Jonathan Haskel, Catherine Mann and Dave Ramsden wanted a stronger 75bp rate rise. In addition, Swati Dhingra preferred a 25bp hike.
Governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro voted in favour of the 50bp rate rise.
In addition, the central bank voted unanimously to reduce its stock of UK government bonds by £80 billion over the next 12 months. It would take its stock to £758 billion.
The BoE warned inflation will remain above 10% ‘over the following few months’, though it now expects it to peak at ‘just under’ 11% in October. It had previously warned of 13% inflation.
‘Given the energy price guarantee, the peak in measured CPI inflation is now likely to be lower than projected in the August report,’ it explained.
New UK Prime Minister Liz Truss earlier in September said domestic energy bills will be frozen at around £2,500 as part of a package to ease the cost-of-living crunch.
In a stark forecast, however, the bank expects the UK to enter into recession as early as the third quarter. It now expects third quarter gross domestic product to fall 0.1%. It had previously anticipated 0.4% growth.
A third quarter GDP fall would represent a second successive quarterly decline, meeting the definition of a recession. Two consecutive quarters of falling gross domestic product meets a long-held basic view of a recession. UK GDP contracted by 0.1% in the second quarter of 2022.
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