She runs, she runs, inflation. The bank from England estimates on Thursday that the country will enter a recession because of galloping inflation. In response to this observation, it announced an increase in its rate directors by half a percentage point, a drastic measure. The BoE’s choice to raise its main rate to 1.75%, an increase of 50 basis points, the largest increase since 1995, also risks weighing on the economy by making borrowing more expensive.
British inflation should, according to the monetary policy report, continue to climb to more than 13% in October, a record since the end of 1980, after having already reached 9.4% over one year in June. What complicate the task of the future Prime Minister, in full campaign of the Conservatives for the succession of Boris Johnson which sees the debates monopolized by the acute crisis of the Cost of life crossed by the British.
Heavy damage to the economy
The outbreak of gas price since the start of the Russian invasion of Ukraine in particular makes the central bank predict a painful 75% increase in the price ceiling of electricity billed to consumers in October. The damage will be heavy for the economy: “We expect a contraction in production every quarter” between the last three months of 2022 and the last three of 2023, warns the Bank of England (BoE).
And “growth after this period will remain very weak”, she adds, with an increase of 3.5% in 2022, but a first contraction of the GDP 1.5% in 2023 and a second of 0.25% in 2024. “I have sympathy for those who wonder why we are raising our rates now and making life more difficult”, assured Andrew Bailey, governor of the BoE, during a conference. “But the alternative option is worse,” he insisted.
“All options on the table”
“Our job is to prevent inflation from setting in for more than two or three years,” as it did in the 1970s, adds Ben Broadbent, member of the monetary policy committee. According to the BoE, it is better to act stronger now than to see the monetary policy tightening cycle take hold over time.
Andrew Bailey indicated that for the upcoming meetings, “all options will be on the table” and that the fight against inflation remained his priority. The BoE is following the lead of the US Federal Reserve and the European Central Bank, which chose to raise their rates by 0.75 and 0.50 percentage point respectively in July. The British central bank has indicated that it will also vote, in September, on the possibility of starting to actively sell the bonds it holds as part of its asset purchase program.