The measure is drastic. The Bank of England (Bank of England, BoE) announced on Thursday August 4 a rise in its key rates to 1.75% to counter inflation, which it now anticipates above 13% over one year in October . On this date, the United Kingdom will enter a recession until the end of 2023, according to forecasts from the English central bank.
The 0.5 percentage point hike is the BoE’s biggest rate hike since 1995. UK inflation already hit 9.4% y/y in June – a 40-year high – fueling a cost crisis of life which particularly threatens the less wealthy British households.
As gas prices have soared since Russia’s invasion of Ukraine began, the BoE expects UK energy regulator Ofgem to raise its electricity price cap for consumers by 75% in October.
The regulator also announced on Thursday that the cap would now be revised every quarter, compared to only twice a year so far, to improve market stability. In the current context, this suggests a new painful rise in prices from January.
Serious consequences for the economy
The damage will be heavy for the economy: “We expect production to contract each quarter between the last of 2022 and the last of 2023”, warns the Bank. And “Growth after this period remains very weak”, completes the monetary institute. In detail, the BoE projects growth of 3.5% in 2022, a first contraction in GDP of 1.5% in 2023 and a second of 0.25% in 2024.
In these circumstances, the BoE’s choice to raise its rates even faster than it has done since the end of 2021 risks weighing on economic activity by making borrowing more expensive for companies and individuals. “A faster pace of monetary policy tightening” today “should help bring inflation back to its 2% target over the medium term, and reduce the risk of a tightening cycle [de la politique monétaire] longer and more expensive in the future”justifies the monetary committee.
