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Full story: UK in recession, says Bank of England as it raises interest rates to 2.25%
Richard Partington
Britain’s economy is now in recession, the Bank of England has said, as it raised interest rates to tackle the worst bout of inflation for 40 years.
A majority of the Bank’s nine-member monetary policy committee (MPC) voted to increase the key base rate by 0.5 percentage points to 2.25% – its highest level since 2008 – judging that the risks of inflationary pressures becoming entrenched outweighed the short-term dangers to the economy.
With soaring energy bills and the rising cost of a weekly shop forcing households to rein in their spending, Threadneedle Street said the economy was heading for a second consecutive quarter of falling output.
After a 0.1% drop in gross domestic product in the three months to June as the economy slumped into reverse, the Bank said a further 0.1% decline could now be expected in the third quarter amid a slump in consumer spending and weaker activity for manufacturing and construction.
It said the fall also reflected a smaller-than-expected bounce back from the additional bank holiday for the Queen’s platinum jubilee, as well as the impact from businesses closing their doors in a mark of respect for the state funeral this week.
Three members of the MPC voted for an increase of 0.75 percentage points, five backed a half-point rise and one pushed for a more limited quarter-point move.
More here:
Newsnight’s Ben Chu shows how high interest rates are expected to rise by next summer:
Resolution Foundation’s Torsten Bell argues that we shouldn’t go overboard with the recession forecast:
I’d take “UK already in recession” headlines with a pinch of salt – they reflect the Platinum Jubilee knocking 2nd quarter growth marginally below zero. “UK economy flatlining” is a fairer reading of where we are (if not a much perkier one I appreciate)
— Torsten Bell (@TorstenBell) September 22, 2022
The two-day Bank holiday for the Jubilee helped to knock GDP down by 0.6% in June, leading to a small (-0.1%) contraction in Q2 overall.
The disappointment is that July didn’t see much recovery – with GDP only rising 0.2%.
Kwarteng: Bank has my full support to fight inflation
Chancellor Kwasi Kwarteng has told Bank of England governor Andrew Bailey that the government remains fully committed to the central bank’s independence.
Bailey has written to Kwarteng explaining why inflation was (far) over the Bank’s 2% target in August (at 9.9%), as he must do under the remit of the MPC.
He pinned the blame primarily on large increases in global energy prices and other tradable goods prices, along with price rises by companies and the UK’s tight jobs market.
In reply, Kwarteng told Bailey that he is backing the Bank:
As we discussed during our meeting on my first day as Chancellor, you have my full support in your critical mission to get inflation under control.
The government’s commitment to the 2% CPI inflation target, and the independence of the Bank remains absolute.
It is essential to businesses and households across the country that inflation is brought back to target, and I know and expect that the MPC will continue to take the forceful action necessary to achieve this and to ensure inflation expectations remain firmly anchored.
UK Finance Minister Kwarteng in letter to BoE’s Bailey: In your crucial endeavour to control inflation, you have my entire support. I am aware of and anticipate that the MPC will continue to take the decisive steps required to maintain firmly anchored inflation expectations.
— DailyFX Team Live (@DailyFXTeam) September 22, 2022
Kwarteng added that he is “focused unashamedly on growing the economy, which will build stronger capacity to alleviate inflationary pressure”.
Sterling hasn’t received much of a boost from today’s interest rate rise.
It’s currently trading just above $1.132, around half a cent higher than the 37-year low hit last night.
BOE raises rates to 2.25%, despite likely recession
BOE hikes rates by 50 bps, keeps “respond forcefully” language Pound, government bonds fall after announcement
Split vote on MPC, new member Dhingra wanted smaller hike pic.twitter.com/v3iDVa6enZ— Warburg (@warburg100) September 22, 2022
Rates expected to double by next summer
The money markets are anticipating that UK Bank Rate will rise to nearly 5% by next summer, as the Bank of England continues to fight inflation.
Such further, rapid tightening would hit economy activity, as Ian Stewart, chief economist at Deloitte, explains:
“Hiking rates when the economy is heading into recession and inflation close to a peak testifies to the Bank’s concern that inflation has become embedded in the system.
“The Bank is unlikely to stop raising rates until price pressures and labour shortages have eased significantly.
“We expect rates to double by the middle of next year, causing a significant tightening of credit conditions, and adding to the downward momentum in the economy.”
…via @samueltombs – after that rate decision financial markets signalling slightly slower rate of interest hikes from Bank of England this year – but market still sees them getting to around 4.8% by next May/June pic.twitter.com/mrhlNIPLeP
— Ben Chu (@BenChu_) September 22, 2022
Today’s half-point hike means the Bank of England has now increased UK interest rates by 200 basis points so far this year.
Bank Rate began 2022 at 0.25%, but soaring inflation has prompted the Bank to raise rates at every meeting this year.
The Bank of England’s job was made even harder by tomorrow’s’ mini-budget, which is likely to include various tax cuts as the government tries to stimulate growth.
David Goebel, associate director of investment strategy at wealth manager Evelyn Partners, says this has created additional uncertainty for the MPC, as it waits for clarity over Kwasi Kwarteng’s plans.
‘As well as inflation at its highest for a generation and faltering expectations for economic growth, the Bank has a new political administration to consider. Liz Truss’ government is set to be very expansionary in fiscal terms, in an attempt to boost growth, with a few specifics of its economic policy revealed at Chancellor Kwasi Kwarteng’s “fiscal event” tomorrow.
While the Bank’s primary mandate is to maintain price stability – i.e. control inflation – without a full view of policy direction it makes decision making difficult given the potential impact on consumer finances and spending.
The rate rise will increase the pressure on families, points out TUC head of economics Kate Bell:
The government must respond in the mini budget with action to get pay rising faster and to protect jobs from a recession that we may already be in.
“The Chancellor can’t do that with bungs to bankers and big business. He must get pay growing by increasing the minimum wage and giving public service staff a proper pay rise that keeps up with prices. And ministers should give all working people the rights they need to bargain for higher pay across the economy.”
Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer, has said today’s interest rate rise shows the government has “lost control of the economy”.
NEW: Interest rates rise to 2.25%.
This Tory government has lost control of the economy.
By putting such huge unfunded and uncosted sums on borrowing they’re pushing up mortgage costs for everyone.
Their reckless approach is an immense risk to family finances.
— Rachel Reeves (@RachelReevesMP) September 22, 2022
The Bank has pledged to act ‘forcefully’ to tame inflation – a signal that further interest rate increases are coming, even though it believes the UK is in recession.
The Monetary Policy Committee insists that “Policy is not on a pre-set path”, as it tries to get inflation down to its 2% target, from 9.9% at present.
Even though a narrow majority of the committee resisted hiking rates by three-quarters of a percent, the MPC says it will be forceful:
The Committee will, as always, consider and decide the appropriate level of Bank Rate at each meeting.
The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.
Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary.
…Bank warns it is prepared to be “forceful” on future rate rises, despite delivering a smaller hike today than the Fed yesterday & than some expected… pic.twitter.com/HsfLmWtmdu
— Ben Chu (@BenChu_) September 22, 2022
The Bank of England will assess the impact of tomorrow’s mini-budget in time for its next interest rate decision in November (when it will publish new forecasts).
The MPC says:
All members also agreed that the forthcoming Growth Plan would provide further fiscal support and was likely to contain news that was material for the economic outlook.
In the November MPC round, the Committee would make a full assessment of the impact on demand and inflation from all these announcements, along with other news, and determine further implications for monetary policy.
Bank of England will assess the inflationary impact of @KwasiKwarteng‘s massive “mini budget” – what the government calls “The Growth Plan” – in its November assessment, it says. Which is when we’ll have a clearer sense of whether markets are right that Bank Rate could double…
— Robert Peston (@Peston) September 22, 2022
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