U.K. Central Bank Forecasts Recession This Year—Joining U.S. And Eurozone With Historic Rate Hike

Topline

The Bank of England on Thursday predicted that the U.K. will fall into a recession in the final quarter of this year as it announced its steepest rate hike in nearly three decades, following similar moves by the central banks of the Eurozone and the U.S. as all of them attempt to clampdown on runaway inflation.

Key Facts

The Bank of England raised interest rates by 50 basis points—its sharpest hike in 27 years—to 1.75%.

The central bank also warned that inflation in the U.K. could rise to 13% by the end of the year—up from 9.4% in June, worsening the country’s already severe cost of living crisis.

The steep inflation means the real household income of Britons will “fall sharply” for the remainder of 2022 and 2023, the central bank noted.

The Bank of England blamed inflation on the “near doubling” of natural gas prices since May due to Russia’s throttling of supplies to Europe and the threat of further reductions.

In a press conference, Bank of England Governor Andrew Bailey said the central bank is committed to its 2% inflation targets and “there are no ifs and buts.”

Bailey, however, suggested that the central bank’s commitment does not necessarily guarantee that interest rates will be raised by another 50 basis points at its next meeting.

Chief Critic

Britain’s Shadow Chancellor, Rachel Reeves, targeted the ruling Conservatives, tweeting that the Bank of England’s grim numbers were “further proof the Tories have lost control of the economy.” She added: “As families and pensioners worry about how they’re going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis.”

Surprising Fact

The Bank of England warned that the U.K.’s high inflation will remain at “very elevated levels” throughout 2023 and will only fall to the targeted 2% level in two years.

Key Background

The Bank of England’s rate hike follows similar moves by the European Central Bank (ECB) and the U.S. Federal Reserve who are also looking to clamp down on spiraling inflation. Last month, the ECB announced a steeper than expected 50 basis points rate hike—its first in 11 years. At the end of July, the Eurozone’s rate of annual inflation stood at 8.9%, which is an all-time record for the bloc of 19 nations using the Euro. Despite the rate hike, ECB President Christine Lagarde said she does not believe a European recession is likely in the next year. Last week, the U.S. Federal reserve announced its second 75 basis point hike in two months after inflation in the U.S. surged to a 40-year high of 9.1% in June. Data released by the Bureau of Economic Analysis showed that America’s GDP shrank for a second consecutive quarter in the three month period ending in June, which means that the country has entered a technical recession.

Further Reading

European Central Bank Raises Interest Rates For The First Time In 11 Years As Global Inflation Surges (Forbes)

Fed Raises Interest Rates By 75 Basis Points Again As Investors Brace For Recession (Forbes)

GDP Flashes Recession Warning Sign: Economy Shrank 0.9% Last Quarter As Experts Warn ‘Worse To Come’ (Forbes)

Recession Watch: Eurozone Beats GDP Estimates But Its Largest Economy Germany Reports 0% Growth (Forbes)