3rd November, 2022
The Bank of England on Thursday jacked interest rate from 0.75 percent to to 3 percent to fight soaring inflation, the highest hike since 1989.
This is despite the prediction that higher interest rates would push the economy into the longest recession since the 1930s.
In a split vote, the central bank’s monetary policy committee (MPC) voted by a 7-2 majority for the biggest increase in rates since 1989 to combat an inflation rate that hit 10.1% in September, The Guardian reports.
According to the CNN, the huge hike matches moves made by the US Federal Reserve on Wednesday and the European Central Bank last week.
Since the Bank of England’s last meeting, UK financial markets have been through a period of unprecedented turbulence and the outlook for the economy has deteriorated.
The last time rates increased by more than 0.5% was in 1989. John Major’s government was forced into a 2% hike during the exchange rate mechanism crisis in 1992, though for less than 24 hours before it was scrapped.
Former Prime Minister Liz Truss’ “mini” budget in late September — with its promise of £45 billion ($51.6 billion) of unfunded tax cuts — crashed the pound, collapsed bond prices, sparked mayhem in mortgage markets and prompted an emergency intervention by the Bank of England to save pension funds from insolvency.
The CNN reports that while Truss’ tax-cutting plans have since largely been ditched, restoring calm to markets and easing expectations for inflation in the medium term, rising food and energy costs are keeping prices high. The annual rate of inflation rose to 10.1% in September, from 9.9% in August, returning to the 40-year high hit in July.
The Guardian explained that the Bank expected inflation, which hit 10.1% in September, to peak at 11% by the end of 2022, and then to fall “probably quite sharply” from the middle of 2023.
The severity and length of the recession is expected to crush consumer spending and hit business confidence, leading to a two-year recession that will be longer, if not deeper, than the slump in the 1930s.