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England raises interest rates by 0.50 point to 2.25% despite recession on radar

The Bank of England (BoE) raised its benchmark interest rate by 0.50 percentage point to 2.25% from 1.75% on Thursday and said it would continue to “respond to hard as needed” to inflation despite the economy going into recession.

The BoE estimates the British economy will shrink by 0.1% in the third quarter – partly due to the extra holiday for Queen Elizabeth’s funeral – which, combined with a fall in output in the second quarter, meets the definition of a technical recession.

Economists polled by Reuters last week had predicted a repeat of August’s half-point rise in rates, but financial markets were betting on a three-quarter-point increase, the biggest since 1989, bar a brief and failed attempt in 1992 to support the lb.

The BoE’s move follows the U.S. Federal Reserve’s decision on Wednesday to raise its key rate by three-quarters of a percentage point as central banks around the world grapple with post-COVID labor shortages and the impact. of the Russian invasion of Ukraine on energy prices.

“If the outlook suggests more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully as needed,” the BoE said, using a similar form of words as in previous months for its policy intentions.

The BoE’s Monetary Policy Committee voted 5-4 to raise rates to 2.25%, with Lieutenant Governor Dave Ramsden and outside MPC members Jonathan Haskel and Catherine Mann voting for an increase to 2.5%, while new MPC member Swati Dhingra wanted a smaller increase to 2%.

The MPC also voted unanimously to reduce the BoE’s £838bn of government bonds by £100bn next year, allowing the bonds to mature and through active sales, which will begin next month. This is in line with the objective stated in August.

The BoE now expects inflation to peak at just under 11% in October, down from the 13.3% peak forecast last month, before Liz Truss wins the Conservative Party leadership and becomes the UK’s prime minister. United with a pledge to cap energy tariffs and cut taxes.

Inflation would remain above 10% for a few months after October before falling, the BoE said.

Consumer price inflation fell to 9.9% in July from a 40-year high of 10.1% in August, its first drop in nearly a year.

On Friday, new finance minister Kwasi Kwarteng will give more details on the government’s fiscal plans, which could amount to more than 150 billion pounds of stimulus.

The BoE said it would assess the implications of this for monetary policy at its November meeting.

However, he noted that the energy price cap, while reducing inflation in the short term, would add to pressures even further.

Prior to the rate decision, financial markets had expected the BoE to raise rates to 3.75% by the end of the year, with a peak of 5% reached in mid-2023. Less than a year ago, BoE rates were at a record low of 0.1%.

The pound sterling fell to its lowest level since 1985 against the US dollar following Wednesday’s Fed decision, although it held up better against the euro.

Source: CNN Brasil

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