Interest rates rise by 0.5% as Bank of England says UK ‘already in recession’

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Interest rates were raised by 0.5%, the Bank of England said.

The Bank of England said it now expects GDP to fall by 0.1% from the current quarter, indicating that the country is already in recession.

The decision to raise interest rates next week was previously delayed by the Bank of England in a show of respect after the Queen’s death.

The interest rate in the UK is now at its highest level since the 2008 financial crisis.

Five members voted in favor of raising the bank rate by 0.5 percentage points to 2.25 percent, three members voted in favor of raising the bank rate by 0.75 percentage points to 2.5 percent, and one member was in favor of raising the bank rate by 0. 25 percentage points, up to 2 percent. .

The bank also lowered its inflation forecast, predicting it would peak at 11% in October, compared to 13% in their latest forecast. The revision came after Prime Minister Liz Truss announced a freeze on the energy price ceiling, which is expected to curb inflation.

In a statement released on Thursday, the Bank of England said: “In its August monetary policy report, MPC noted that the risks associated with its outlook from both external and internal factors were exceptionally large given the very large increase in wholesale prices. on gas from May and the subsequent impact on real incomes of British households and on CPI inflation.

“Since August, wholesale gas prices have been extremely volatile and there have been significant changes in financial markets, including a sharp increase in government bond yields around the world. Sterling depreciated substantially over this period.”

Ahead of Thursday’s announcement, ING economist James Smith said the Bank of England should respond to the recent fall in the price of the pound. On Friday, the pound hit a new 37-year low against the dollar.

ING is in favor of a 50 basis point increase, but expects politicians to also vote for a 75 basis point increase.

He said rates are likely to rise again in November and December, reaching 3% by the end of the year.

The decision to raise interest rates is an attempt to keep inflation under control. This is the best tool available to the Bank of England to bring inflation, currently at 9.9%, back to its 2% target.

“The decline in annual inflation in August 2022 mainly reflected the fall in motor fuel prices in the transport part of the index,” the report says.

“A small, partially offsetting upward effect was caused by rising prices for food and non-alcoholic beverages, various goods and services, and clothing and footwear,” he added.

Despite falling below 10%, George Lagarias, chief economist at accounting firm Mazars, said inflation will not drop significantly for some time.

“The increase in energy prices over all previous months has completely affected most supply chains, and it will take months of lower oil prices for end-user prices to drop significantly again. Inflation may well remain a central topic until at least the end of the year,” he said.

“However, production costs have started to come down and we will eventually have to see how this translates into overall prices.”

But the decisions will also have a major impact on people’s finances, not least those with mortgages who will need to start paying more for their home loans.

The MPC was originally due to announce its decision on 15 September, but delayed by a week due to the Queen’s death.

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