Bank Of England Steps Up Tightening Despite Looming Recession

(RTTNews) - The Bank of England raised its benchmark rate by half-a-percentage point and outlined plans to offload government bonds citing persistent inflationary pressures and the tight labor market conditions despite a looming recession.

The Monetary Policy Committee of the central bank voted 8-1 to lift the bank rate by 50 basis points to 1.75 percent, the highest rate since December 2008. This was the sixth consecutive rate hike.

Governor Andrew Bailey and seven other members preferred a 50 basis point increase, which is the biggest hike since the bank gained operational independence over the monetary policy from the British government in 1997.

Policymaker Silvana Tenreyro, however, sought a quarter-point hike as she observed that the bank rate might already have reached the level consistent with returning inflation to the 2 percent target in the medium term.

Most members said a 0.5 percentage point increase was warranted at this meeting as these members found a more forceful policy action justified.

A majority of members assessed that a faster pace of policy tightening at this meeting would help to bring inflation back to the 2 percent target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later.

The MPC said the policy was not on a pre-set path. The scale, pace and timing of any further changes in Bank Rate would reflect the committee's assessment of the economic outlook and inflationary pressures.

The committee also decided to sell the stock of gilts purchased by the central bank, starting September. The bank intends to reduce government bond holdings of around GBP 10 billion per quarter.

The BoE raised its inflation outlook largely due to the surge in wholesale gas prices since May, owing to Russia's restriction of gas supplies to Europe.

Consumer price inflation was expected to rise more than forecast in the May Report. Inflation is projected to peak just over 13 percent in the fourth quarter of this year, and to remain at very elevated levels throughout much of next year, before falling to the 2 percent target in 2025.

The bank had earlier projected inflation to peak above 11 percent in October.

The central bank forecast the economy to grow 0.4 percent in the third quarter, slightly weaker than had been incorporated in the May Report.

The size of the economy will fall over the next year as rising energy prices is squeezing households' income. The bank expects the economy to enter recession later this year and to contract throughout next year. GDP is projected to fall about 2.1 percent in total.

Although the MPC suggested that rates will probably have to rise further to knock on the head the recent rises in price/wage expectations, a painful recession will probably mean that rate cuts will be required further ahead, Capital Economics economist Paul Dales said. The economist expects interest rates to rise to a peak of 3.00 percent and stay there next year and well into 2024.

ING economists, however, viewed that the BoE's next rate hike in September could be the last.

The window for further hikes further appears to be closing, not least because outside of the jobs market, there are signs that some of the key inflation drivers may be starting to ease, they said.