WORLD NEWS

Bank of England predicts recession at the end of the year

Aug 4, 2022, 5:32 AM | Updated: 10:01 am
Deputy Governor for Financial Stability, Sir Jon Cunliffe, Governor of the Bank of England, Andrew ...
Deputy Governor for Financial Stability, Sir Jon Cunliffe, Governor of the Bank of England, Andrew Bailey, Executive Director for Communications, James Bell, attend the Bank of England's financial stability report press conference at Bank Of England on July 5, 2022 in London, England. (Photo by Stefan Rousseau - WPA Pool/Getty Images)
(Photo by Stefan Rousseau - WPA Pool/Getty Images)

LONDON (AP) — The Bank of England says the United Kingdom’s economy is projected to enter a recession in the final three months of the year, amid soaring gas prices stemming from Russia’s invasion of Ukraine.

The bank said Thursday that inflation will accelerate to over 13% in the fourth quarter and remain “very elevated,” for much of 2023. The forecast reflects a sharp increase from the 9.4% rate recorded in June.

The bank’s forecasters say inflation will hit its highest point for more than 42 years amid the doubling of wholesale gas prices.

The 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.

It comes as the bank raised interest rates by half a percentage point as it seeks to tame accelerating inflation, marking its biggest hike in more than 27 years.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

LONDON (AP) — The Bank of England raised interest rates by half a percentage point Thursday, marking its biggest hike in more than 27 years as it seeks to tame accelerating inflation driven by the fallout from Russia’s invasion of Ukraine.

The increase, passed by a 8-1 vote by the bank’s monetary policy committee, 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.

The Bank of England has been criticized for moving too slowly to combat inflation, which accelerated to a 40-year high of 9.4% in June and has driven a cost-of-living crisis. While the central bank has approved five consecutive rate increases since December, none before Thursday exceeded a quarter-point.

By contrast, the U.S. Federal Reserve increased 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 European Central Bank’s first increase in 11 years was a larger-than-expected half-point hike last month.

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 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. The U.K. economy is likely to expand just 0.5% next year, the slowest growth rate among the world’s advanced economies, the IMF said.

The landscape is especially complicated for central banks because many of the factors driving inflation are beyond their control, particularly food and energy prices that have soared due to uncertainty surrounding Russia’s invasion.

But those external pressures are now becoming embedded in the U.K. economy, with public- and private-sector workers demanding wage increases to prevent inflation from eroding their living standards.

“This explains why at the MPC’s last meeting we adopted language which made clear that if we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully,” Bailey said in speech last month.

The last time the U.K. approved a similar rate increase was December 1994, when interest rate decisions were still made by the government’s treasury chief in consultation with the central bank governor.

The Bank of England predicted that inflation will reach over 13% in the final three months of the year and remain “very elevated” for much of 2023.

“With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023,” said Jack Leslie, senior economist at the Resolution Foundation, a think tank focused on the living standards of low- and middle-income families. “How long this high inflation will last is hugely uncertain, but the cost-of-living crisis looks set to last longer and hit households harder than previously anticipated.”

But even with all the pressure for a big increase in interest rates, some economists think the Bank of England will remain cautious as it seeks to protect economic growth.

Dean Turner, an economist at UBS Global Wealth Management, said he is sure the bank will raise rates, just not by how much.

“What is a central banker to do?” he asked. “Should they be prioritizing current inflation, most of which is driven by factors beyond the control of the Bank of England, or the faltering growth backdrop? I do not envy them.”

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Bank of England predicts recession at the end of the year