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The Bank of England raised rates and announced a recession (September 22, 2022)

The Bank of England on Thursday raised its key rate to 2.25% from 1.75%, saying it would continue to respond “strongly as needed” to inflation. At the same time, he said that the British economy was entering a recession.


The Bank of England estimates that British GDP will contract by 0.1% in the third quarter, which, combined with the same fall in the second quarter, meets the definition of a technical recession. Unlike the US, where after a similar situation in the first half of the year they still refuse to acknowledge the fact of a recession, in the UK they adhere to just such a definition. In this regard, the forecast for annual inflation has been reduced to 11% from the previous 13%.


At the same time, the Bank of England admitted that a deep recession could be averted as a result of the implementation of Prime Minister Liz Truss’s plan to help the population and businesses in the field of energy. Its details, as well as tax cuts and other measures, should be made public on Friday. However, the Bank of England noted that demand would be supported with implications for inflation.


This, in turn, is fraught with problems for economic growth, because in order to combat rising consumer prices, the regulator may be forced to go for a more serious rate hike in the future. Combined with the demand by some voters for the rate to be raised by 75 bp rather than 50 bp, this reinforced market expectations for a larger hike later this year.


The pound sterling weakened nonetheless as the Bank of England refrained from a larger rate hike, similar to the one the Fed did the day before. Although most economists predicted a move of 50 bp. p., the markets saw a probability of 75 bp. The British currency fell to a minimum since March 1985 – $1.121.

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