Bank of England flags risks
Central bank warns of recession, 10% inflation as it raises rates again
LONDON — The Bank of England sent a stark warning that Britain risks a doublewhammy of a recession and inflation above 10 per cent as it raised interest rates on Thursday to their highest since 2009, hiking by a quarter of a percentage point to one per cent.
The pound fell by more than a cent against the U.S. dollar to hit its lowest level since mid-2020, below $1.24, as the gloominess of the new forecasts for the world’s fifth-largest economy caught investors by surprise.
They also trimmed bets on the central bank hiking rates aggressively this year. Shortdated British government bond yields slid sharply.
The bank’s nine rate-setters voted 6-3 for the rise in the bank rate from 0.75 per cent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25 per cent.
Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia’s invasion of Ukraine sent energy prices spiralling.
The Bank of England said it was also worried about the impact of renewed COVID-19 lockdowns in China that threaten to hit supply chains again and add to inflation pressures.
But policy makers around the world are also trying to avoid sending their economies into a slump.
“It is a very weak projection, a very sharp slowdown,” bank governor Andrew Bailey told reporters.
“There’s a technical definition of a recession it doesn’t meet but put that to one side, it is a very sharp slowdown in activity.”
On Wednesday, the U.S. Federal Reserve raised rates by a half point to a range of 0.75-1.0 per cent, its biggest increase since 2000. Chair Jay Powell said more such hikes were on the table.
But Powell said the U.S. economy was performing well, a contrast with Bailey’s more downbeat assessment.
The Bank of England’s rate rise was its fourth since December, the fastest pace of policy tightening in 25 years.
It said most policy makers believed “some degree of further tightening in monetary policy may still be appropriate in the coming months.” It dropped the word “modest” to describe the scale of rate hikes ahead.
A split emerged, with two members saying the guidance was too strong given the risks to growth.
“The new forecasts, taken together with the increasing division among committee members, suggest the bank is getting closer to a pause in its tightening cycle,” said ING economist James Smith.
Suren Thiru, head of economics at the British Chambers of Commerce, said the rate hike and deteriorating outlook would cause “considerable alarm among households and businesses.”
INFLATION TO TAKE OFF
British consumer price inflation hit a 30-year high of seven per cent in March, more than triple the bank’s two per cent target, and the central bank revised up its forecasts for price growth to show it peaking above 10 per cent in the last three months of this year.
It had previously predicted a peak of about eight per cent in April.
The bank said British inflation would peak later than in other big advanced economies due to a cap on household energy tariffs. Fuel bills jumped by 54 per cent in April and the bank now sees a further 40 per cent increase in October.
Real post-tax household disposable income, a measure of living standards, is forecast to fall 1.75 per cent this year, the biggest calendaryear drop since 2011 and the second-biggest since records began in the 1960s.
Bailey said inflation would most hurt “those with least bargaining power and those who are often least well off,” describing that impact as “a great concern.”
The Bank of England kept its forecast for economic growth this year at 3.75 per cent but slashed its forecast for 2023 to show a contraction of 0.25 per cent from a previous estimate of 1.25 per cent growth. It cut its growth projection for 2024 to 0.25 per cent from one per cent.
While growth in the first three months of this year has been stronger than the bank predicted, it expects the economy to stagnate in the second quarter due to an extra public holiday and reduced COVID testing. It sees a nearly one per cent fall in GDP in the final quarter as the next energy price rise kicks in.
Those forecasts were based on bets in financial markets that the bank would increase rates to about 2.5 per cent by the middle of next year, which the bank signalled was probably too much.
It said it expected inflation would fall to 1.3 per cent in three years’ time, based on market pricing for interest rates, as higher unemployment and the cost-of-living squeeze hit the economy. That would be the biggest undershoot relative to its two per cent target since the 2008-09 global financial crisis.