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The Bank of England launches the biggest rate hike in 27 years to curb runaway inflation

2022-08-04T14:47:57.505Z

The entity raises the interest rate by half a point, to 1.75%, and warns of an economic recession in the fourth quarter



The Bank of England (BoE, in its acronym in English) has pulled heavy artillery in the face of inflationary pressure, with an interest rate hike of half a point, the largest since 1997, to set rates at 1.75%.

This sixth consecutive increase ratifies the new orthodoxy of an entity that, in the last 14 years, had kept the price of money at historical lows as an antidote to systemic tremors such as the credit crisis, or Brexit, but now faces a unprecedented price escalation in more than four decades.

The CPI is not, however, the only problem that the BoE sees on the economic horizon.

According to the powerful Monetary Policy Commission (MPC), the United Kingdom will experience a deep recession in the fourth quarter, which will last until the end of 2023. British GDP, always according to central bank estimates, will fall 2.1%

The problem now, however, has ramifications that go beyond the size of the economy.

If after the banking collapse, the BoE's challenge was to provide stimuli for growth, now the challenge is directly linked to the institution's great task: controlling the cost of living.

Its objective is to keep inflation at bay, with a 2% target, but the United Kingdom is not an exception to the global price trend, nor does it escape the pressure that the hydrocarbon, energy and food crisis imposes on the CPI .

As a consequence, the bank has revised its own estimates for the coming months upwards and, following this morning's monthly meeting, has forecast inflation to hit 13% and remain in double digits well into next year.

The numbers forecast for the start of autumn are two points higher than the worst scenario previously forecast by the BoE and four points higher than the most recent data (June).

To find a similar reference, one must go back to 1980, when the country was on the threshold of one of the deepest periods of economic, industrial and productive reconversion undertaken since the end of World War II.

The pound reacted significantly to Governor Andrew Bailey's gloomy narrative and, despite rising interest rates, suffered a sharp 0.6 percent devaluation against the dollar, completing the dire combination of runaway inflation, protracted recession and currency volatility.

who, in the coming months, will have to manage who moves to Number 10 Downing Street, after the forced departure of Boris Johnson.

The favorite of all the polls, the current foreign secretary, Liz Truss, has been very tough on the BoE's management during the succession race and has promised substantial reforms to reduce her monopoly on price controls.

In fact, the great bet of his campaign is the reduction of taxes, a vocation that, according to his rival, the Finance Minister Rishi Sunak until a month ago, is not only unfeasible as long as inflationary pressure continues, but could even increase it plus.

Source: elparis

All business articles on 2022-08-04

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