GB: BoE raises key rate to 2.25% despite likely recession

Written September 22, 2022, 1:50 p.m

(In the 6th paragraph read “80 billion pounds” and not “100 billion pounds”)

by David Milliken

LONDON, Sept 22 (Reuters) – The Bank of England (BoE) raised its key interest rate by half a point on Thursday, assuring it would continue to “respond forcefully, as much as necessary” to inflation despite the likely entry into recession of the economy.

The British base rate is thus increased to 2.25% against 1.75%, as expected by the Reuters consensus.

The BoE is now forecasting a 0.1% decline in UK gross domestic product (GDP) in the third quarter, partly due to the extraordinary holiday decreed to mark the funeral of Queen Elizabeth II. This decline, after the one already registered in the second quarter, corresponds to the definition of a technical recession.

The half-point increase was voted in by five of the nine members of the Monetary Policy Committee (MPC), while three others voted for a three-quarter point increase and one for a 25 basis point increase.

“Should the outlook suggest more sustained inflationary pressures, including related to stronger demand, the Committee would respond strongly as appropriate,” the BoE said in a statement.

The MPC also voted unanimously to reduce a total of 80 billion pounds sterling within a year of the 838 billion (around 960 billion euros) portfolio of government and corporate bonds this year through market purchases.

Britain’s inflation, the central bank said, is expected to peak next month at just under 11%, down from the 13.3% forecast last month, before Liz Truss became prime minister and pledged to curb inflation, higher energy bills and lower taxes.

However, the rise in prices should remain above 10% year-on-year for a few months before tapering off, the BoE specifies.

UK consumer price inflation eased in August, but at 9.9% year-on-year is still close to the 40-year high set in July at 10.1%, more than five times higher than the BoE’s target.

New finance minister Kwasi Karteng is due to present the government’s budget forecast on Friday, which could include more than £150 billion in stimulus.

The BoE explains that it will take into account the consequences of these announcements at its monetary policy meeting in November. However, it notes that a ceiling on energy prices, while limiting inflation in the short term, risks boosting inflationary pressure in the longer term.

In financial markets, the British pound extended its losses minutes after these announcements to fall back below $1.13; it had hit a 37-year low of 1.1213 earlier in the day.

On the contrary, the interest rates on British government bonds rose sharply, at

3,482

% for two-year bonds and

3,399

% for ten-year bonds, the highest since July 2011.

On the London Stock Exchange, the FTSE 100 index lost

0.41

%. (Reporting by David Milliken and Andy Bruce; French Editing by Marc Angrand; Editing by Sophie Louet and Kate Entringer)

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