British Interest Rate Hike

August 4, 2022

The Bank of England’s 50-basis point interest rate hike to 1.75% also matched expectations, but the decision was not a unanimous one. Committee member Tenreyro preferred an increase of 25 basis points, the size of the previous four increases done in February, March, May and June. The Bank of England’s initial rate hike last December had been a move of 15 basis points from the pandemic low of 0.10%, and it was the first increase by a major industrialized economy in the current cycle of rate normalization. A statement explaining today’s sixth rate hike projects that CPI inflation is now up to 9.4% and expected to crest in October around 13.2% but then “to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead… Underlying nominal wage growth is expected to be higher than in the May Report over the first half of the forecast period.” Regrettably as a result of the very elevated inflation and the need to counter such:

The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

This sobering warning concedes that unusually high uncertainty surrounds the baseline scenario but implies that the Bank Rate will rise by a further 125 basis points over the coming twelve months. The statement also announces that net gilt sales to reduce the central bank’s balance sheet will start next month.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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