The Bank of England raises its key rate and estimates the economy already in recession

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The Bank of England raises its key rate and estimates the economy already in recession

The Bank of England expects UK inflation to peak in October at just under 11% year on year, compared to 13% expected so far.

The Bank of England announced on Thursday a marked increase in its key rate in an attempt to curb inflation, although less abrupt than that adopted the day before by the American Federal Reserve (Fed), while the economy Britain's economy is expected to fall into recession as early as the third quarter.

The Monetary Policy Committee (MPC) was divided: out of nine members, five voted for a 0.50 point hike to 2.25%, the Bank of England (BoE) said in a statement, bringing the rate to a high since 2008.

The Bank further estimates that UK inflation will peak in October at just under 11% year on year, compared to 13% forecast so far.

While the BoE started its cycle of rate hikes as early as December 2021, earlier than most other major central banks, to move away from its all-time low of 0.1%, it is taking action today today less strongly than the European Central Bank (ECB) and the Fed, which announced tightening of 0.75 points.

The division of the MPC in the UK reflects the hesitations of central bankers around the world. The latter are struggling to fight against inflation, caused in particular by the surge in energy prices since the start of the war in Ukraine, but risk weighing down global economic activity, which is already struggling. , making borrowing more expensive.

Bank of England Governor Andrew Bailey

In the last 24 hours, in addition to the Fed, the Swiss Central Bank raised its rates by 0.75 points, while the Bank of Norway, like the BoE, contented itself with an increase of 0.75 points. 0.5 points.

The Japanese monetary institution meanwhile maintained its ultra-loose monetary policy, even though the government announced that it would intervene in the foreign exchange market to support the yen.

In the United Kingdom United, uncertainty is high due to Friday's budget announcements expected from Conservative Prime Minister Liz Truss's new government.

The BoE warns it will need, after the presentation of the mini-budget, study the measures announced in detail to decide on its next actions on the rates.

The flagship measure is for the moment the freezing of electricity bills for two years for individuals, and support for around half of the energy cost for businesses. This caused the Bank of England to lower its inflation forecast.

However, it should remain above 10% for several months before falling, predicts the BoE. Members of the MPC who would have liked to see the BoE follow in the footsteps of the Fed and the Swiss National Bank with a 0.75 point hike admit that the cap on the price of energy will temper the short term x27;inflation and help households.

They fear, however, that it will stimulate consumer spending and therefore higher prices in the longer term.

Raising rates faster now would help bring inflation back towards its medium-term target, and reduce the risk of a longer and more costly cycle of hikes, they argue, according to Thursday's report. their meeting the day before.

Economists such as Ian Stewart, analyst at Deloitte, indeed believe that the British central bank is far from having finished with its towers of monetary screws.

“We expect rates to double again before the middle of next year, which will constrain lending and weigh on an economy that is already hunkering down”

— Ian Stewart, analyst at Deloitte

And UK economic activity is already struggling as the BoE suggests the UK is already in recession: Staff at the Bank now expects GDP to contract 0.1% in the third quarter, a second consecutive quarter of declines. This is the generally accepted definition of a recession.

By raising its rates as the government tries to revive the economy, the BoE could also aggravate her dispute with the executive.

During her campaign for the succession of Boris Johnson, Ms Truss criticized the BoE, accusing it of not having acted quickly enough and promising to review its status.

The pound climbed 0.03% to $1.1273 by mid-afternoon, but struggled to move away from its lowest since 1985 hit in early trading at $1.1212, on the heels of the Fed's decision.

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