Bank of England predicts year-end recession

London: The Bank of England projected on Thursday that the United Kingdom’s economy would enter recession at the end of the year as it raised interest rates by the largest amount in more than 27 years, reducing inflation driven by Russia’s war-torn fall. The emphasis was on speeding up. in Ukraine. A rate hike of […]
 


Bank of England predicts year-end recession

London: The Bank of England projected on Thursday that the United Kingdom’s economy would enter recession at the end of the year as it raised interest rates by the largest amount in more than 27 years, reducing inflation driven by Russia’s war-torn fall. The emphasis was on speeding up. in Ukraine. A rate hike of three-quarters of a point raises the bank’s key interest rate to 1.75%, the highest since the depth of the global financial crisis in December 2008. The move comes as Russia sharply lowers consumer prices driven by rising energy costs. Europe restricts natural gas and further cuts are a risk, Bank of England government Andrew Bailey said.

 

“The war has an economic price,” Bailey told a news conference. “But let me be clear, this will not deter us from setting monetary policy to bring inflation back to the 2% target.”

 

The bleak outlook in the world’s fifth-largest economy reflects the ripple effect of the war, with people mired in a subsistence crisis that has raised the cost of everything from groceries to utility bills. And it highlights the difficult situation that central banks around the world are facing: how to control rising inflation without plunging economies that were just beginning to recover from the coronavirus pandemic.

 

The bank said that in the UK, inflation will exceed 13% in the last three months of the year and will remain “very high” until 2023. The forecast shows a sharp increase from the 40-year high of 9.4% recorded in June.

Forecasters at the bank say inflation will hit its highest point in more than 42 years amid a doubling of war-linked wholesale natural gas prices. Energy prices will push the economy into a five-quarter recession – GDP will shrink each quarter in 2023.

“By historical standards, the growth thereafter is very weak,” the bank said.

Central banks around the world are making borrowing costs higher for consumers, businesses, and the government, which tends to reduce spending and drive rising prices. But such moves are also likely to slow economic growth.

The US Federal Reserve has aggressively shifted its key rate by three-quarter points to a range of 2.25% to 2.5% over the past two months. The US economy shrank for the second straight quarter from April to June, raising fears that the country could be approaching a recession.

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

“The Bank of England has become the latest in a series of international central banks to hike historically large rates,” said Luke Bartholomew, senior economist at Aberdon. “The Bank’s forecasts illustrate how difficult the UK economic picture is compared to other major countries.”

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

The scenario is particularly complex for central banks because many of the factors driving inflation are beyond their control, particularly food and energy prices that have risen because of the uncertainty surrounding Russia’s invasion.

External pressures are becoming embedded in the UK economy, with workers in the public and private sector demanding wage increases to prevent inflation from lowering their standard of living.

“With gas prices reaching record levels, both homes and businesses will see a major increase in their energy bills throughout the winter and into 2023,” said Jack Leslie, senior economist at the Resolution Foundation, a think tank that looks at living standards. is focused. Low and middle income families.

The last time the UK approved a similar interest rate hike was in December 1994, when those decisions were still made by the government’s Treasury head in consultation with the central bank governor.

Dean Turner, an economist at UBS Global Wealth Management, said he is not jealous of the Bank of England’s position.
“What is the central banker to do?” He asked. “Should they prioritize current inflation, much of which is driven by factors beyond the control of the Bank of England, or a faltering growth background?”