UK ‘in recession’ as Bank of England raises interest rates to highest level since 2008

The Bank of England announced that it will raise interest rates to their highest level in more than 13 years and indicated that it believes the economy is already in recession.

The central bank had previously projected the economy to grow in the current financial quarter, but said it now believes gross domestic product (GDP) will fall 0.1%.

It comes after a reported 0.2% drop in GDP in the second quarter and would mean the economy is currently in recession.

A technical recession is when the economy contracts for two quarters in a row.

The Bank’s Monetary Policy Committee (MPC) decided to raise rates to 2.25%, the highest since December 2008, from 1.75%, in an effort to cope with large increases in the cost of living.

In committee minutes, he said that “adjusted work with wage growth and domestic inflation” above targets called for a “forceful response.”

(PA graphics)

However, the rise fell short of expectations from financial markets, who had forecast a 0.75 percentage point rise in line with the rate hike announced by the US Federal Reserve on Wednesday.

The MPC made the decision after five members of the nine-member board voted in favor of the 0.5 percentage point increase, including Bank Governor Andrew Bailey.

Three members, Jonathan Haskel, Catherine Mann and Dave Ramsden, voted for a 0.75 percentage point increase, while one member, Swati Dhingra, called for a 0.25 percentage point increase.

The decision to raise rates is a bid to keep inflation in check. It is the best tool the Bank of England has to bring inflation, currently at 9.9%, back to its 2% target.

At the September meeting, the MPC also said that inflation will now not rise as high as expected after the government announced plans to freeze energy prices for households earlier this month.

Bank of England Stability Report

Bank of England Governor Andrew Bailey (Yui Mok/PA)

Consumer Price Index (CPI) inflation will now peak at “just under 11%” in October. This would mark the highest inflation the UK has seen since January 1982.

However, MPC members said the Energy Price Gaurantee would provide support to households, but would “add to demand pressure” and could result in sustained high inflation.

At its previous meeting in August, the Bank of England warned that inflation was likely to peak at 13.3% and the country would see five consecutive quarters of recession.

However, the Bank’s MPC has seen a politically turbulent period in the seven weeks since the last meeting, in which Liz Truss was appointed Prime Minister, and her new Government unveiled energy support for consumers and businesses.

Finance Minister Kwasi Kwarteng is also due to announce new fiscal measures, called the Growth Plan, on Friday. The Bank said it will consider the impact of this plan at its next MPC meeting.

The Bank also voted unanimously to reduce quantitative easing by £80bn over the next 12 months to £758bn.

The MPC was originally scheduled to announce its decision on Thursday, September 15, but pushed it back a week due to the Queen’s death.

Downing Street declined to comment on the Bank of England’s decision to raise the base interest rate.

A Number 10 spokeswoman said: “That is obviously an independent Bank of England issue.

“I’d like to point out the support we’ve put in place to help people with the cost of living, which we know is a concern for families and businesses across the country.

“I would point you to the support we provide and the immediate assistance we provide for energy bills in particular.”

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