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ECONOMY

Wed 15 Mar 2023 9:17 pm - Jerusalem Time

The Bank of England warns of a two-year recession in Britain and raises interest rates

London - (AFP) - The Bank of England raised key interest rates Thursday by 0.75 points to 3 percent, the largest increase since 1989, to counter inflation, which will push Britain into recession that is set to last until mid-2024.


After a regular meeting, the Bank of England said it raised borrowing costs by 0.75 points to 3% - the biggest increase since the 2008 global financial crisis - to adjust for UK inflation, which is expected to soon peak at a four-decade high of around 11%. .


"We have a difficult road ahead," Bank of England Governor Andrew Bailey told a news conference.


He warned that "the sharp increase in energy prices resulting from the Russian invasion of Ukraine has made us poorer as a nation. It is expected that the level of economic activity will be non-existent and may even decline for some time."


The recent increase in interest rates reflects central banks raising interest rates around the world as food prices and energy bills rise.


Wednesday, the US Federal Reserve raised interest rates for the fourth time in a row by 0.75 points - and its chairman, Jerome Powell, suggested that the increase would be higher than expected.


The Bank of England said that inflation in Britain will peak at 10.9% this year, but with such a high level, analysts said the central bank's interest rate could reach 5% in the coming months.


The minutes of its meeting warned of "difficult prospects for the British economy," which "is expected to remain in recession for a long time," dealing a blow to the troubled British government.


The Bank of England said that the economy has contracted since the third quarter and entered a period of technical recession that will continue until the first half of 2024.
The pound sterling fell 2% against the dollar amid expectations of a prolonged recession.


"The typical trade no longer holds because currencies usually go up when the central bank raises interest rates," said Naeem Aslam, chief market analyst at Avatrade.


"Difficult times lie ahead and we will see the economy, the markets and the currency deteriorate in the coming months," he added.


The FTSE 100 index in London improved, losing about half a percent.


The Bank of England's interest rate hike is set to exacerbate the cost of living crisis for millions of Britons as central banks' rate hikes cause retail lenders to raise interest rates on their own loans.


"The central bank has had the unenviable task of combating spiraling inflation amid economic and political uncertainty," said Craig Erlam, an analyst at trading platform OANDA.


UK mortgage payments have also risen in recent weeks after the heavily indebted budget of former British Prime Minister Liz Terrace forced her resignation and led to an emergency purchase of British government bonds by the Bank of England. Her successor, Rishi Sunak, tried to calm the markets by hinting at tax increases in a new budget on November 17, even if such a move hurt the British economy.


"I think everyone knows we are facing a difficult economic outlook and tough decisions will have to be taken," Sunak, the former British finance minister, told parliament on Wednesday.


The annual inflation rate in Britain is 10.1%, the highest level in 40 years.


With the onset of the Covid pandemic in early 2020, the Bank of England cut its key interest rate to a record low of 0.1% and also injected huge amounts of cash into the economy.


The Bank of England began raising interest rates last December, while Thursday's decision was the eighth consecutive increase.
"Importantly, most of the policy tightening over the past year has not yet affected the real economy," the Bank of England's minutes said.

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The Bank of England warns of a two-year recession in Britain and raises interest rates

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