(updated with details)
by William Schomberg and David Milliken
LONDON, Aug 4 (Reuters) – The Bank of England (BoE) on Thursday made the biggest hike in its key interest rate in 27 years in a bid to stem inflation, which is expected to peak at more than 13% this year in Britain, while warning that a long recession was imminent.
The BoE raised its key rate by half a point to 1.75%, its highest level since the end of 2008, as expected by a large majority of economists and analysts polled by Reuters ahead of the meeting of the Monetary Policy Committee ( MPC).
The decision was passed by eight votes, with only one member of the Committee – Silvana Tenreyro – having voted for an increase limited to 25 basis points.
The BoE has warned that Britain’s economy is set to contract from the fourth quarter and through 2023, which would mark its longest period of recession since the global financial crisis of 2008-2009.
At the same time, consumer price inflation should peak at 13.3% year on year in October, mainly due to soaring energy prices linked in particular to the war in Ukraine.
British consumers would then see their disposable income fall for two consecutive years.
British inflation in June reached its highest since 1982 at 9.4%, more than four times the 2% target set by the BoE.
This increase in the cost of living has triggered a multiplication of social movements, strikes by railway workers in particular, and increases the pressure on the contender for the succession of Boris Johnson as Prime Minister for the release of additional financial aid. to households.
The BoE previously predicted inflation would peak at over 11% and the economy would almost stagnate until 2025 at the earliest.
In its new forecast, the central bank estimates that inflation will fall back to 2% within two years as the blow to the economy trickles down to demand.
NO PREDEFINED PLAN
The British central bank has raised its rate six times since December, but the magnitude of the increase voted on Thursday is the largest since 1995.
The pressure on members of the institution for an acceleration of monetary tightening intensified after the tightening of the US Federal Reserve, the European Central Bank and other major central banks.
The BoE reiterated that it was ready to act forcefully if necessary to stem more persistent inflationary pressures.
But she stressed that there were “extremely large” uncertainties about the economy and that she would judge the next steps to take depending on how the situation developed.
“Politics is not on a predefined trajectory,” the BoE said. “The magnitude, pace and timing of any further rate changes will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”
The BoE further indicated that it planned to start selling government bonds on its balance sheet, with active sales of around 10 billion pounds per quarter, soon after its next meeting in mid-September.
On the financial markets, the FTSE 100 index gained 0.49%.
The yield on British ten-year government bonds was down after the announcements at 1.837% while the pound fell 0.54% against the dollar.
“The decision to raise the rate by 0.50% comes as no surprise. However, the gloomy outlook for GDP and rising inflation forecasts included in the release have shaken market confidence, resulting in the decline in the pound,” said Sam Cooper, vice president at Silicon Valley Bank. (Report William Schomberg and David Milliken, with Andy Bruce, French version Laetitia Volga, edited by Nicolas Delame and Jean-Stéphane Brosse)