Britain faces a prolonged recession and the worst squeeze on living standards in more than 60 years, the Bank of England warned on Thursday, as it raised interest rates sharply and forecast inflation would hit 13 % at the end of the year.
Eight of the nine members of the Monetary Policy Committee voted to raise interest rates by 0.5 percentage points to 1.75 percent, the highest level since the global financial crisis.
This follows aggressive steps by the European Central Bank and the US Federal Reserve in the face of rising inflation. Silvana Tenreyro, an outside member, voted against the majority for a smaller increase of 0.25 percentage points.
The BoE said that due to the latest rise in gas prices, it now expects inflation to rise above 13 percent by the end of the year, well above its May forecast, and to remain at ” very high levels” throughout 2023 before falling. return to the 2% target in two years.
The pound fell as much as 0.4% to $1.209 after the news, while the yield on 10-year UK government bonds fell 0.07 percentage points to 1.85%.
The near-doubling of wholesale gas prices since May could push the typical annual household fuel bill from just under £2,000 to around £3,500 when regulated prices rise in October, the BoE said.
With wages rising at around half the rate of inflation, their forecasts showed that after-tax household incomes would fall in real terms in both 2022 and 2023, even after taking into account the fiscal support that the government announced in May. The top-to-bottom drop of more than 5% in household income would be the worst on record, with data going back to the 1960s.
Even with households reducing their savings, consumer spending was set to ease over the next year, the BoE said, dragging down economic growth. Its forecasts showed a much deeper contraction in GDP than predicted in May, with the economy entering recession in the fourth quarter of 2022 and continuing to contract for five consecutive quarters.
A top-to-bottom fall in GDP of 2.1% would be comparable to that seen in the early 1990s and the BoE said that even once the economy emerged from recession, growth was expected to be “very weak by historical standards.”
The BoE’s aggressive tightening of monetary policy will worsen the immediate pressure on household incomes, but the central bank said it could not avoid an adjustment triggered by major global shocks.
The MPC said it was acting in case a long period of high inflation caused by global factors led to “longer-lasting” domestic price pressures, repeating its previous guidance that it would “act strongly” if necessary. However, he also stressed that policy was “not on a pre-set path,” suggesting that the 50 basis point rate hike was not necessarily the first of many.
The BoE’s central forecast, which is based on market expectations to raise interest rates to 3% next year, showed inflation still in double digits in the third quarter of 2023, but returning to the central bank’s 2% target a year later. If the BoE took no further policy action, its forecasts show that inflation would still fall below 2% by the end of 2024.
The BoE said uncertainty around its central forecast, which assumes energy prices will follow market expectations for the next six months but remain unchanged thereafter, was “exceptionally large”, but that the alternative scenarios he published still showed “very high inflation in the short term, a fall in GDP over the next year and a marked decline in inflation thereafter”.
The BoE also set out plans to begin monthly sales of the £875bn of assets it has built up under its quantitative easing program since 2009, which it aims to carry out at a constant rate, so that the interest rates are still their main tool to adjust. monetary policy.
He said he had a tentative mind to start selling gilts shortly after their September meeting, aiming to reduce his holdings by around 80 billion pounds in the first 12 months. Given the profile of bream maturing over this period, this would imply a sales program of around £10bn per quarter.