Business desk
LONDON: The Bank of England raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.
Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% — its highest level since late 2008 — from 1.25%.
The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.
Governor Andrew Bailey said all options were on the table for the BoE’s next meeting in September, and beyond.
“Returning inflation to the 2% target remains our absolute priority. There are no ifs and buts about that,” Bailey said at a news conference.
MPC member Silvana Tenreyro voted for a 25-basis-point increase.
The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s but far less than the hit from COVID-19 and the downturn caused by the 2008-09 global financial crisis.
The economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since the global financial crisis.
Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3% in October — the highest since 1980 — due mostly to the surge in energy prices following Russia’s invasion of Ukraine.
That would leave households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.
Sterling fell against the US dollar while futures priced in a further 25-basis-point rise in interest rates, to 2%, for the next BoE meeting in September.
