UK Sees Biggest Interest Rate Hike in 27 Years Amid Soaring Inflation, Coming Recession

Soaring inflation expected to climb to over 13 percent has prompted the UK’s central bank to deliver the biggest interest rate hike in 27 years even as officials warned Great Britain is heading into a recession.

The Bank of England announced that on August 4, its rate-setting body the Monetary Policy Committee, (MPC), voted 8-1 in favor of raising the key interest rate by 50 base points to 1. 75 percent.

The lone dovish view on the committee called for a 25 basis point hike, while all nine MPC members expressed concern about decades-high inflation and further upward pressure on prices, vowing to keep raising rates at future meetings if needed.

” The Committee will pay particular attention to signs of persistent inflationary pressures and, if required, will take forceful action in response,” said the MPC in a statement.

‘More Enduring’ Wage-Price Pressures

Members noted that persistently high inflation may fuel an “enduring” wage-price spiral, as the labor market will likely remain tighter than expected for longer periods of time.

The committee stated that inflationary pressures have increased in Europe and Britain since May’s MPC policy report.

” This mainly reflects the neardoubling of wholesale gas prices from May, due to Russia’s restrictions on gas supplies to Europe. The risk of additional curbs is also a factor,” the committee stated.

The MPC expects that near-term inflation will rise more than previously forecasted, citing the increase in wholesale energy costs.

“CPI inflation is expected to rise more than forecast in the May Report, from 9.4 [percent] in June to just over 13 [percent] in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2 [percent] target two years ahead,” the MPC said.

Recession Coming

The stickiness in inflationary pressures within the UK can be seen in the MPC’s prediction that inflation (as measured by the Consumer Price Index, or CPI) will fall to 9.5% a year.

Persisting inflation will likely intensify the UK’s cost-of-living crises. Real wages are expected to plummet by inflation-adjusted rates.

Rising energy prices are the main reason for a decline in Great Britain’s economic outlook. The MPC expects that the UK will enter recession this year.

The

“Output projections are for a fall from 2022Q4 to 2023Q4.” the committee stated. According to historical standards .”

, the growth thereafter was very low.

The MPC stated that there are “extremely large uncertainties” around the economy which could mean the downturn is less severe than or more severe than the baseline forecast.

With Thursday’s 50 base point increase, the British central banks has raised rates six more times than December.

The rate increase put pressure on the British Pound, and it fell in morning trading against the U.S. Dollar.