The Bank of England decided today to raise rates the most since 1989, matching the Federal Reserve’s rate increase of 75 basis points. At the same time, the UK’s central bank signaled that the country’s economy is probably in recession. The Wall Street Journal’s Paul Hannon reports:
The Bank of England raised its key interest rate by 0.75 percentage point on Thursday, its largest rise since 1989, as it fights a surge in inflation from rising energy prices even as the U.K. economy slides into an expected recession.
The central bank raised its benchmark lending rate for the eighth consecutive meeting to 3% from 2.25%, taking it to the highest level since November 2008. Higher borrowing costs will hurt an already weak economy as consumers brace for a difficult winter of falling real incomes and rising prices.
The BOE said the U.K. economy likely entered a recession in the three months through September, when output fell an estimated 0.5%. It said its Monetary Policy Committee expects a long-lasting recession, the length and depth of which depended on how high the bank raises rates to corral prices.
“The MPC’s latest projections describe a very challenging outlook for the U.K. economy,” the BOE said in a statement. “It is expected to be in recession for a prolonged period.”
The bank said U.K. financial markets were currently pricing in a path for its key rate that would peak at 5.25% late next year, a level which it forecast would cause the U.K. economy to contract 1.5% next year and a further 1% in 2024, causing unemployment to rise to 6.5% by the end of 2025.
But it signaled that it doesn’t expect to end up raising rates as much as investors anticipate. “Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets,” it said.
Still, even if the bank keeps its current rate of 3%, the U.K. economy is likely to endure a recession until the last quarter of next year, it said.
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