Bank of England says UK in recession as it raises interest rates to 14-year high of 2.25% – business live

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The Bank has pledged to act ‘forcefully’ to tame inflation – a signal that further interest rate increases are coming, even though it believes the UK is in recession.

The Monetary Policy Committee insists that “Policy is not on a pre-set path”, as it tries to get inflation down to its 2% target, from 9.9% at present.

Even though a narrow majority of the committee resisted hiking rates by three-quarters of a percent, the MPC says it will be forceful:

The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting.

The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.

The Bank of England will assess the impact of tomorrow’s mini-budget in time for its next interest rate decision in November (when it will publish new forecasts).

The MPC says:

All members also agreed that the forthcoming Growth Plan would provide further fiscal support and was likely to contain news that was material for the economic outlook.

In the November MPC round, the Committee would make a full assessment of the impact on demand and inflation from all these announcements, along with other news, and determine further implications for monetary policy.

The Bank of England has also warned that the government’s energy price freeze will push up inflation in the medium-term.

With energy bills rising less sharply, households will have more money to spend on other goods and services (although some people are already having to skip meals due to rising bills)

The Monetary Policy Committee says:

While the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period.

All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.

That’s a signal that monetary policy may need to be tightened more aggressively in future – meaning higher interest rates for longer.

The UK is already in recession, the Bank of England fears, partly due to the bank holiday to mark the Queen’s funeral.

Bank staff have downgraded their growth forecasts, and now predict GDP will shrink by 0.1% in the third quarter of the year.

That would follow the 0.1% drop recorded in April-June – making it the second quarterly contraction in a row.

A month ago, the Bank had predicted the economy would grow by 0.4% in July-September.

But weaker-than-expected growth of just 0.2% in July, and Monday’s bank holiday for the state funeral, have led it to slash its forecasts.

The minutes of this week’s meeting say:

Bank staff now expected GDP to fall by 0.1% in Q3, below the August Report projection of 0.4% growth, and a second successive quarterly decline.

That fall would also, in part, reflect the smaller-than-expected bounce back in growth following the bank holiday in Q2 and the expected impact from the additional bank holiday in September for the Queen’s state funeral.

The Bank has lowered its forecast for inflation, due to the energy price freeze.

They now predict that CPI inflation is likely to peak in October at just under 11% – lower than the peak of 13% forecast last month, before the two-year cap on bills was announced.

The minutes of the meeting warn, though,t hat we could suffer double-digit inflation for months:

Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back.

The Bank has also decided to start unwinding its stock of UK government bonds, built up through its quantitative easing programme following the financial crisis, and then the pandemic.

It will reduce the stock of purchased UK government bonds by ?80bn over the next twelve months, to a total of ?758bn.

This is “in line with the strategy set out in the minutes of the August MPC meeting”, it says.

It means the Bank will be reducing its holdings, just as the UK government looks to borrow more, to fund energy price caps and likely tax cuts.

The Bank of England’s monetary policy committee was split, badly, over today’s interest rate decsion.

Five members – governor Andrew Bailey, deputy governors Ben Broadbent and Jon Cunliffe, chief economist Huw Pill, and external member Silvana Tenreyro – voted to lift rates by half a percent, to 2.25%

Three – external members Jonathan Haskel and Catherine Mann, plus deputy governor Dave Ramsden – pushed for a larger, 75 basis point hike (which would have been the biggest since 1989).

And the MPC’s newest member, Swati Dhingra, voted to only raise rates by 0.25%.

This lack of unanimity is not a good look for the Bank.

Newsflash: The Bank of England has raised UK interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.

That’s the seventh consecutive increase in Bank Rate in a row, but a smaller rise than many City investors had expected.

Today’s rate rise — the second 50bp increase in a row – shows that the Bank is trying to prevent inflation becoming persistently embedded, despite concerns over the economy.

The decision by the Bank’s monetary policy committee takes rates to the highest level since 2008.

The UK government’s energy bill freeze might encourage the Bank of England to resist raising rates by as much as three-quarters of a percent.

The average domestic energy bill is being frozen at ?2,500 a year until 2024, superseding Ofgem’s price cap that was supposed to rise to ?3,549 on 1 October, and then again in January.

That means CPI inflation should peak lower and sooner than previously expected (but still leaves households paying much more for energy than a year ago).

RBC Capital Markets explains:

That should, in turn, weaken the argument that the MPC to act to quicken the pace of tightening in coming months to control inflation expectations in the face of high and rising spot inflation while also affording the Committee a degree of space attach more weight to the outlook for activity in their decision making.

We’ll find out in 15 minutes….

Ricardo Evangelista, senior analyst, ActivTrades, says it is “widely assumed” that the Bank of England will announce a rate hike of 75 basis points.

The BoE’s own predictions point to an incoming recession, while the government is having to borrow enormous amounts in order to mitigate the effects of a devastating rise in the country’s cost of living.

Looking ahead, despite the shift to a more hawkish stance by the central bank, the pound is likely to remain under pressure because of the country’s downgraded economic prospects.

Last month, the Bank raised interest rates by 50bp:

Tension is mounting in the City, as investors brace for the Bank of England’s interest rate announcement at noon.

We’re expecting a hefty increase in borrowing costs – at least another half-point, as the central bank tries to cool inflation despite fears the UK is heading towards recession.

Many traders predict the BoE could hike rates by three-quarters of a percent. That would take Bank rate to 2.5%, from 1.75% today, the highest since the start of the financial crisis.

That would be the biggest rate rise since 1989 – and with inflation at 9.9% in August, the Monetary Policy Committee may choose to tighten policy aggressively. Especially as the Federal Reserve raised its key interest rate by another 75bp last night, hitting the pound to 37-year lows today.

The decision has been delayed by a week due to Queen Elizabeth II’s funeral.