BoE Flags Risk of Recession and 10% Inflation as it Raises Rates Again

MACROECONOMICS - ​LONDON. The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10% as it raised interest rates on Thursday to their highest since 2009, hiking by a quarter-point to 1%.

The pound fell by more than a cent against the U.S. dollar to hit its lowest level since mid-2020, below $1.24, as investors reacted to the darker economic forecasts.

They also trimmed bets on the central bank hiking rates aggressively this year. Short-dated British government bond yields slid sharply.

The BoE's nine rate-setters voted 6-3 for the rise in Bank Rate from 0.75%, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25%.

Economists polled by Reuters had forecast a more dovish 8-1 vote to raise the benchmark for borrowing costs to 1%, with one policymaker opposing a hike.

Read Also: Gold Rises Over 1% After U.S. Fed Softens Hawkish Stance

Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia's invasion of Ukraine sent energy prices spiralling.

The BoE said it was also worried about the impact of renewed COVID-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.

But policymakers around the world are also trying to avoid sending their economies into a slump.

"The point being is we are walking this very narrow path now," Bailey told reporters.

On Wednesday, the U.S. Federal Reserve raised rates by half a percentage point to a range of 0.75-1.0%, its biggest increase since 2000. Chair Jay Powell said further 50-basis-point hikes were on the table.

The BoE's move represented its fourth consecutive rate hike since December, the fastest pace in 25 years.

The BoE said most policymakers believed "some degree of further tightening in monetary policy may still be appropriate in the coming months". It dropped the word "modest" to describe the scale of rate hikes ahead.

A split emerged, with two members saying the guidance was too strong given the risks to growth.

Business groups expressed concern about Thursday's move.

"The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures," said Suren Thiru, head of economics at the British Chambers of Commerce.