The Bank of England (BoE) raised its key rates on Thursday by 0.75 points to 3%, its biggest increase since 1989 to counter inflation, while signaling to the market that it overestimated its desire to continue hikes that weigh on the economy.
The BoE is aiming for inflation of 2%, and as it is currently above 10%, "
further hikes (of key rates) will be necessary to reach our objective, however the top will be lower than the market expects
", indicated the BoE in a summary of its meeting.
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If it is following in the footsteps of the European Central Bank and the American Federal Reserve, which have both raised their key rates by 0.75 points in recent days, the BoE, which had been one of the first banks to increase them end of 2021, is now one of the first to signal an upcoming downturn.
Often accused of sending unclear messages to the markets, the Bank of England opted for an explicit message by assuring them that their expectation of a rate above 5% in 2023 would be too harmful for the British economy.
In its projections, which are still based on rates that would evolve in line with market bets, the BoE paints a dismal economic landscape, with eight consecutive quarters of economic contraction from mid-2022.
In this scenario, the cost of borrowing would become too high for households and businesses, and would add to the cost of living crisis caused by the Russian invasion of Ukraine and soaring energy prices. .
As for inflation, “
it should fall well below the 2% target in two years, and even lower in three years
”, specifies the BoE.
Even if rates remained at 3%, a high since 2008, the recession would last until the end of next year, warns the BoE.
“
Bank researchers expect GDP to have contracted 0.5% in the third quarter, 0.9 percentage points lower than expected (in the latest forecast) in August
,” says the Committee. monetary policy (MPC) in its minutes.
“
This expected weakness partly reflects the public holiday due to the Queen's funeral in September, but is mainly caused by a weakness in production
,” he said.
Inflation is expected to peak at just under 11% in October, slightly less than expected due to government measures to limit energy prices.
"Blind" decision
The BoE's forecasting exercise is particularly perilous given the political uncertainty in the UK, and several observers have noted that once again the Bank is making its decision '
blind
'.
Already in September, it had raised its rate by 0.5 percentage point on the eve of budget announcements by the new Prime Minister Liz Truss, the very high cost of which sent the cost of the British debt soaring.
The Monetary Policy Committee (MPC) had no idea of the magnitude of the announced plan and that its disastrous reception on the markets was going to push the Prime Minister to resign.
From now on, the Bank is awaiting the decisions of its successor Rishi Sunak on November 17, who on the contrary has promised an austerity plan based on spending cuts and tax increases.
“
The committee will take into account upcoming government announcements at its December meeting and when it reviews its projections in February
,” the BoE said.
Elsewhere, the Bank resumed its bond sales, interrupted by the shock caused by Ms. Truss' budget announcements.
The BoE is seeking to reduce the huge envelope of securities it holds as part of its asset purchase programs (Quantitative easing or QE), in particular purchased in the first months of the Covid-19 pandemic.
The first sale of government bonds took place on 1 November.
“
On November 2, 2022, the total amount of assets held for monetary policy purposes was £855 billion, consisting of £837 billion in UK government bonds and £17.4 billion in corporate bonds
,” lists the BoE.