Bank of England governor Andrew Bailey said the alternative to a hefty rate hike was 'worse'
London (AFP) - Britain will sink into a lengthy recession later this year as inflation rockets even higher, the Bank of England forecast Thursday as it unveiled the biggest interest rate hike since 1995.
The move comes as Britons endure a cost-of-living crisis that has dominated the race to succeed Boris Johnson following his resignation as prime minister.
The BoE’s Monetary Policy Committee voted 8-1 to lift its key rate by 0.50 percentage points to 1.75 percent, it said in a statement.
Most policymakers felt that a “more forceful policy action was justified” than in previous meetings to combat rampant inflation fuelled by rocketing domestic energy bills.
The BoE is the latest central bank to ramp up its rates as countries around the world battle decades-high consumer prices that have soared since Russia invaded Ukraine in February.
“I have huge sympathy for those who are struggling and are asking why we’re making it even harder,” bank governor Andrew Bailey said at a news conference.
“All I can say is the alternative is worse,” he said.
- ‘Winter is coming’ -
UK inflation was predicted to peak this year at just over 13 percent, reaching the highest level since 1980. The BoE’s chief task is to keep inflation close to a target of 2.0 percent.
The bank said wholesale gas prices have nearly doubled since May due to Russia restricting supplies to Europe, warning that this will “exacerbate” the fall in real incomes and further increase inflation in the near term.
The bank now anticipates the UK economy will enter a painful recession in the fourth quarter that will last until late 2023.
The UK economy is expected to shrink by up to 2.1 percent in size from its highest point, according to the forecast.
“Winter is coming, and it’s shaping up to be an absolute horror show for the UK economy,” said Laith Khalaf, analyst at AJ Bell, an investment platform.
“Make no mistake, 0.5 percent is a historic interest rate rise, but it is overshadowed by the abysmal economic forecasts produced by the Bank of England,” Khalaf said.
UK inflation had already jumped to a four-decade high of 9.4 percent in June.
“Our job is to make sure that this inflation, created by the crisis, isn’t still around in two, three years,” said BoE deputy governor Ben Broadbent.
The BoE rate hike met expectations but the British pound sank 0.7 percent versus the euro and dollar as dealers fretted over the gloomy outlook.
- ‘Challenging winter ahead’ -
The two Conservatives vying to succeed Johnson seized on the BoE announcement to highlight their cost-of-living plans.
Liz Truss, who leads in the polls, has pledged to start cutting taxes from day one with an emergency budget.
“Today’s (BoE) news underlines the need for the bold economic plan that I am advocating. We need to take immediate action to deal with the cost of living crisis, grow the economy and delivering as much support to people as possible,” she said.
Former finance minister Rishi Sunak tweeted that “one of the most urgent challenges we face as a country is getting inflation under control as quickly as possible.”
“As prime minister I would prioritise gripping inflation, growing the economy and then cutting taxes.”
Added to the picture, UK energy regulator Ofgem is due to ramp up domestic electricity and gas prices again in October, just ahead of the colder northern hemisphere winter.
The BoE said Thursday that the typical UK household energy bill will leap to £3,500 ($4,255) per year as a result.
Separately, Ofgem warned Thursday that Britons face a “very challenging winter ahead”, adding its energy price cap will now be reviewed every quarter instead of every six months.