Bank Of England Hikes Rate By 50 Bps; Sees Economy In Recession

RTTNews | 1022 days ago
Bank Of England Hikes Rate By 50 Bps; Sees Economy In Recession

(RTTNews) - The Bank of England raised the benchmark rate by a half percentage point on Thursday, defying expectations for a bigger move, as policymakers assessed that the UK economy has already landed in a recession.

The Monetary Policy Committee decided to raise the bank rate by 50 basis points to 2.25 percent from 1.75 percent, in a three-way split vote. The seventh straight rate hike took the interest rate to the highest since the 2008 global financial crisis.

Some analysts had forecast a 0.75 percentage point increase but only three policymakers sought such a big hike. Five members of the MPC including Governor Andrew Bailey voted for a 0.5 percentage point increase, while one member sought a quarter point rise.

The half percentage point increase from the BoE was less aggressive compared to its major counterpart U.S. Federal Reserve, which tightened the rate by 75 basis points for the third straight time on Wednesday.

The European Central Bank joined the 75 basis point rate hike club earlier this month. The Swiss National Bank also tightened the rate by a similar pace earlier on Thursday.

A 75 basis points move from BoE later this year cannot be ruled out, and it is clear the bank is delaying some judgment on the government's fiscal plans until it has had a chance to update its forecasts ahead of the November meeting, economists at ING said.

New Chancellor Kwasi Kwarteng is set to announce a mini budget on Friday, which is likely to include a stamp duty cut, energy support plans and policies to underpin the economic activity.

The central bank repeated that policy is not on a pre-set path and the committee will decide the appropriate level of Bank Rate at each meeting.

The scale, pace and timing of any further changes in Bank Rate will be based on the assessment of the economic outlook and inflationary pressures.

The Monetary Policy Committee unanimously decided to begin the sale of UK government bonds held in the Asset Purchase Facility shortly after this meeting.

The BoE staff forecast the UK economy to shrink 0.1 percent in the third quarter instead of 0.4 percent growth projected in August, which would be a second successive quarterly decline reflecting a technical recession. GDP had fallen 0.1 percent in the second quarter.

Despite a slight slowdown to 9.9 percent in August, the headline inflation rate remained close to a 40-year high.

Given the Energy Price Guarantee, BoE said the peak in consumer price inflation is expected to be lower than projected in the August inflation Report, at just under 11 percent in October versus the previous forecast of 13 percent.

Nonetheless, inflation is forecast to remain above 10 percent over the following few months, before starting to fall back.

As inflation exceeded the 2 percent target by more than 1 percentage point, BoE Governor Bailey wrote an open letter to the Chancellor explaining why inflation moved away from the target and what action the bank is taking to bring inflation back to 2 percent.

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