The pound sterling dropped on Thursday after the Bank of England upped interest rates by the biggest increase in 27 years.
At the same time it delivered the rise in interest, the bank warned that a long recession was on its way amid skyrocketing inflation.
What exactly did the bank say?
The Bank of England’s Monetary Policy Committee voted 8-1 to lift its key rate by 0.5 basis points to 1.75%.
Most members felt that a “more forceful policy action was justified” than in previous meetings. The action, which makes the cost of borrowing money more expensive, is aimed at combating rampant inflation fueled by soaring energy bills.
UK inflation was predicted to peak at just over 13% this year — the highest level since 1980. It had already jumped to a four-decade high of 9.4% in June.
“Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly” since May, the Band of England said.
The bank said this reflected a near-doubling in wholesale gas prices in that time because of Russia’s restriction of gas supplies to Europe — and the risk of further curbs.
Risk of recession versus inflation
The bank also said it anticipated that the UK economy would enter a painful recession lasting until late 2023. However, it predicted that the recession would be shallower than the 2008 crash that followed the global financial crisis.
Bank of England Governor Andrew Bailey said returning inflation to the 2% target “remains our absolute priority.” He said all options would remain on the table at the policy committee’s next meeting in September.
The raising of UK interest rates — which follows a series of smaller hikes — mirrors similar increases from the US Federal Reserve and the European Central Bank last month.
By raising the cost of borrowing, the bank is hoping to cool down the economy by making people effectively buy less. However, it’s a tricky tightrope to walk. If interest rates stay too high for too long, there is a bigger risk of recession.
