Bank of England predicts recession by end of year

Largest interest rate hike in 27 years

LONDON, Aug 4, (AP): The Bank of England projected Thursday that the United Kingdom’s economy will enter a recession at the end of the year as it hiked interest rates by the largest amount in more than 27 years, pushing to tame accelerating inflation driven by the fallout from Russia’s war in Ukraine.

The rate hike of three-quarters of a point pushes the bank’s key interest rate to 1.75%, the highest since the depths of the global financial crisis in December 2008. Most economists expected the hike after Gov. Andrew Bailey said two weeks ago that the United Kingdom’s central bank would “act forcefully” if the inflation picture worsened.

Inflation

And worsen it will. Inflation will accelerate to over 13% in the final three months of the year and remain “very elevated” for much of 2023, the bank said. The forecast reflects a sharp increase from the 40-year high of 9.4% recorded in June and paints a bleak picture of the future, with people already facing a cost-of-living crisis that has surged the cost of everything from groceries to utility bills.

The bank’s forecasters say inflation will hit its highest point for more than 42 years amid the doubling of wholesale natural gas prices tied to the war. Those energy prices will push the economy into a five-quarter recession - with gross domestic product shrinking each quarter in 2023. “Growth thereafter is very weak by historical standards,” the bank said.

Central banks worldwide are struggling to control surging inflation without tipping economies into recession that were just beginning to recover from the coronavirus pandemic. Higher interest rates raise borrowing costs for consumers, businesses and the government, which tends to reduce spending and ease rising prices. But such moves are also likely to slow economic growth.

The U.S. Federal Reserve has moved aggressively, increasing its key rate by three-quarters of a point in each of the past two months to a range of 2.25% to 2.5%. The U.S. economy shrank from April through June for a second straight quarter, raising fears that the nation may be approaching a recession.

Recession is also a growing concern in Europe as shrinking flows of natural gas from Russia skyrocket prices, drive inflation and threaten to force factories to ration this winter. Targeting persistently high inflation, the European Central Bank’s first rate increase in 11 years was a larger-than-expected half-point hike last month.

“The Bank of England has become the latest in a string of international central banks to deliver historically large rate hikes,” said Luke Bartholomew, senior economist at abrdn. “The bank’s forecasts make clear just how difficult the UK’s economic picture is compared with other major countries.”

The International Monetary Fund last week cut its outlook for global economic growth, citing higher-than-expected inflation, continuing COVID-19 outbreaks in China and further effects from the war in Ukraine.