UK faces big inflation shock, defends historic hike

LONDON – The Bank of England defended its decision to raise interest rates at the fastest clip in 27 years on Thursday, saying the UK faces a “very big” shock to inflation.

BOE Governor Andrew Bailey said risks of high inflation persisting since the Bank’s last meeting in June had increased, prompting the Bank to take “more vigorous action”.

“We are facing a very big shock to inflation,” Bailey told CNBC’s Joumanna Bercetche. “Our action today was very, very clear [that] we think we need to act stronger.”

The BOE on Thursday raised interest rates by 50 basis points, pushing borrowing costs to 1.75% in an ongoing effort to curb rising inflation.

It also gave a bleak outlook for economic growth in the UK and predicted the country will slip into recession from the fourth quarter of 2022, with the downturn expected to last five quarters.

GDP growth in the UK has slowed and the economy is expected to slide into recession later this year.

Andrew Bailey

Governor, Bank of England

The central bank has been criticized for not acting sooner and more aggressively to tackle runaway inflation. But Bailey insisted on Thursday that many of the inflationary shocks facing the British economy were external and unexpected — most notably the Russian war in Ukraine and its ill effects on energy prices.

“We don’t make policies after the fact,” Bailey said. The war in Ukraine “is not something that was foreseen or frankly could have been foreseen.”

UK inflation taps to 13.3%

The Bank’s Monetary Policy Committee approved the sixth consecutive rate hike with an 8-1 majority in favor of the historic half-point hike.

The rate hike marks the central bank’s biggest hike since 1995 as it tries to bring inflation back to its 2% target.

Inflation in the UK hit a new 40-year high of 9.4% in June, as food and energy prices continued to rise, exacerbating the country’s historic cost of living crisis.

The BOE on Thursday raised interest rates by 50 basis points and brought borrowing costs to 1.75% in an ongoing effort to curb rising inflation.

Yui Mok | Afp | Getty Images

The BOE said inflation in the UK is now peaking at 13.3% in October, well above the previously forecast 11%, mainly driven by rising energy prices. It added that it expects inflation to remain at high levels for much of 2023, before falling toward its target in 2025.

“This increase in energy prices has exacerbated the decline in real incomes and thus led to another significant deterioration in the outlook for business in the UK and the rest of Europe. UK GDP growth has slowed and the economy is now expected to enter a recession later this year,” Bailey told a news conference earlier this year.

The Bank’s shift to a more aggressive tightening stance brings it closer to that of other Western monetary policymakers. Last month, the US Federal Reserve and the European Central Bank raised interest rates by 75 basis points and 50 basis points respectively.

Market analysts said the BOE’s determination to contain inflation “vigorously” suggests it could make a further increase of 50 basis points at next month’s meeting.

“For now, the priority remains clearly focused on controlling inflation at the expense of growth,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.

“This indicates that another 50 basis point rate hike is possible at the next MPC meeting in September, subject to interim economic data.”

— Elliot Smith of CNBC contributed to this report.

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