The Bank of England has raised interest rates to 2.25% – a 14-year high – and has also issued a warning that Britain may already be in a recession.
The raise in interest rates is the second 0.5% rise in a row, and the seventh time the Bank has raised interest rates in its battle against soaring inflation.
The minutes of the meeting also warn that Britain could already be in recession.
UK GDP: Second quarter of decline
The minutes say ‘Bank staff now expected GDP to fall by 0.1% in Q3, below the August Report projection of 0.4% growth, and a second successive quarterly decline.
‘That fall would also, in part, reflect the smaller-than-expected bounce back in growth following the bank holiday in Q2 and the expected impact from the additional bank holiday in September for the Queen’s state funeral.’
Many analysts had expected a larger interest rate rise of 0.75%.
On Wednesday, America’s Federal Reserve raised interest rates by 0.75%, with chair Jerome Powell vowing to ‘keep at’ the battle against inflation.
Inflationary pressure
John Hardy, head of foreign exchange strategy at Saxo Bank, told CNBC, “If the Bank of England fails to hike 75 basis points, let’s shield our eyes for what is going to happen to the pound here.
The Bank of England also warned that the Energy Price Guarantee may add to inflationary pressures.
Prime Minister Liz Truss unveiled a £150 billion support package for households and businesses, with energy bills for average households capped at £2,500 from October for two years.
The minutes say, ‘While the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.
