–Governor Andrew Bailey Vows to Tame Inflation Despite Economic Cost
By Laurie Laird
LONDON (MaceNews) – The Bank of England lifted its benchmark rate by 50 basis points on Thursday – the biggest rise in 27 years – despite warning of recession later this year.
That takes the Bank Rate to 1.75%, the highest since late 2008, with Governor Andrew Bailey vowing to bring inflation back to the Bank’s 2% target, “despite the economic cost of the Ukraine war.”
Eight members of the Monetary Policy Committee supported the 50-basis point hike, with external representative Silvana Tenreyro favouring a quarter-point increase, in line with moves implemented since the Bank began tightening policy in December.
The move comes despite a marked downgrade to economic forecasts contained in the August Monetary Policy Report, also released on Thursday. The Bank expects the UK economy to enter recession in the fourth quarter and shrink through all of 2023 for a peak-to-trough contraction of 2.1%. Unemployment is likely to rise to 5.5% in 2024 from the current level of 3.8%.
Despite the expected downturn, inflation is forecast to peak at 13.3% in October, the highest level since 1980, a significant increase from the 11% forecast in May. That will lead to a 5% fall in real incomes by 2024, the biggest squeeze since records began in 1964, according to the MPR.
Bailey declined to provide forward guidance on future Bank actions, given “the exceptionally large risks around the MPC forecasts, due to energy prices and the actions of Russia.”
But he attempted to dispel assumptions that 50-basis point rate hikes could become the norm. Policy “is not on a pre-set path,” he told reporters after the rate decision. “What we do this time does not tell you what we’ll do next time.”
The MPC “provisionally” plans to begin trimming in balance sheet “shortly after” the September rate-setting meeting, according to minutes of this week’s meeting. The committee envisions sales of approximately £10 billion per quarter,” Bailey added.
The rate hike comes as aspiring Conservative party leader Liz Truss renews her intention to review the Bank of England’s mandate. At a campaign event this week, Truss told party members of her plan “to change the Bank of England’s mandate to make sure it matches some of the most effect central banks in the world at controlling inflation.” Truss has previously contrasted the BoE’s performance unfavourably with that of the Bank of Japan.
The latest polls show Truss opening up a lead on her rival Rishi Sunak, a previous Chancellor of the Exchequer. The winner – chosen from a ballot of Conservative party members – will become prime minister in early September, replacing the incumbent, Boris Johnson, who resigned last month.
The 50-basis point hike was largely expected, but sterling fell sharply, hitting 1.2066 before recovering to 1.2108 by late afternoon, down 0.3% on the day.