[ad_1]
UK to enter recession, Bank of England warns
The Bank of England is also warning that the UK economy will enter recession later this year.
The Bank has cut its growth forecasts, and now sees the economy falling into recession from the October-December quarter.
In a grim warning about the economic outlook, it says:
GDP growth in the United Kingdom is slowing.
The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.
Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.
NEW: 🚨
*Bank of England raises interest rates by 0.5% to 1.75%, biggest rise in 25 years,
*as it predicts an even higher peak in inflation of 13 (THIRTEEN) %🚨 Bank predicts recession starting this year lasting as long as financial crisis (5 quarters), as deep as 1990s
— Faisal Islam (@faisalislam) August 4, 2022
The Bank of England has hiked interest rates to 1.75% this lunchtime and has predicted five consecutive quarters of recession. Meanwhile, both the prime minister and leader of the opposition are on holiday…
— Sophie Morris (@itssophiemorris) August 4, 2022
Key events
Filters BETA
UK banks have been quicker to pass the increase in interest rates to borrowers than savers so far, Bailey says.
He points out that when rates fell to record levels after the financial crisis, the official rate got out of line with savings rates.
But it is very important that savers receive the returns they should receive, Bailey adds.
The Bank of England is seeing signs of price rises that “do concern us, frankly” says governor Andrew Bailey.
Some recent price moves suggest the companies are managing to pass on their rising cost to consumers, Bailey explains, which could make inflation more persistent.
[Marmite-maker Unilever, for example, managed to raise its prices by 11% year-on-year in the last quarter]
Bailey also says the tight jobs market could lead to inflationary pressures too, with firms struggling to hire staff.
Bank denies slamming on the brakes after being asleep at the wheel
Q: A year ago you predicted inflation would peak at 4%, now you’re predicting it will peak at 13.3%. Critics say you’ve been asleep at the wheel, and are now slamming on the brakes at exactly the wrong time – haven’t they got a point?
I don’t think they do, Andrew Bailey hits back, pointing to the very big external shocks from Covid disruption and the Russian invasion, which hit the UK one after the other.
No-one could have predicted a Ukrainian war a year ago, governor says.
He also pushes back against criticism that the Bank provided too much support during the pandemic — arguing that UK GDP has only risen slightly above pre-pandemic levels, even with the quantitative easing conducted by the BoE.
Deputy governor Ben Broadbent also defends the Bank’s handling of the monetary policy levers.
Broadbent argues that if the Bank has known in late 2020 what Putin was planning, interest rates would have needed to rise into double-digits, causing a severe recession, to keep inflation at 2% today.
Vladimir Putin’s weaponisation of gas supplies will drive inflation even higher than feared by the end of the year, explains Newsnight’s Ben Chu:
Why does the Bank of England now think consumer price inflation will peak at 13% this year, rather than the 11% projected in its last forecast round in May?
In one chart it’s this – wholesale energy futures have soared since then after Putin’s weaponisation of gas exports… pic.twitter.com/vL2Wmj6259
— Ben Chu (@BenChu_) August 4, 2022
…those futures will feed directly into Ofgem’s regulated domestic energy price cap (sending it higher) – and those domestic energy bills will directly send up UK consumer price inflation
— Ben Chu (@BenChu_) August 4, 2022
There is a lot of uncertainty in the Bank’s forecasts, as it simply can’t know how energy prices will change (due to factors well out of its control).
But the broad picture is bleak for poorest households.
Q: Are there any scenarios that are not catastrophic for the least well-off, and pretty devastating for average earners?
Andrew Bailey replies that the Bank is very conscious that the poorest are hit hardest by the inflation in essential goods and services, such as food and energy.
“If we don’t bring inflation back to target, given the huge scale of the energy shock, it’s going to get worse, and it will get worse precisely, I’m afraid, for those who are least well off in society.”
Bailey adde he has “huge sympathy and huge understanding” for those who are struggling most with this, who will wonder why he has raised interest rates today
Doesn’t that make it worse, from that perspective, in terms of consumption? I’m afraid it doesn’t, because, I’m afraid the alternative is even worse, in terms of persistent inflation.”
The Bank of England’s new forecasts are frankly dire:
Governor Bailey has brought charts…
1990s style recession… lasting as long as both 1990s and Great financial crisis (though not as deep as that one)… pic.twitter.com/0nJjIGPu92
— Faisal Islam (@faisalislam) August 4, 2022
Q: Is the Bank giving up on trying to tred the narrow path of managing inflation and growth, and simply focusing on squashing inflation?
Bailey denies it, saying the analogy still holds for the BoE – and is also used by other central banks as policymakers try to steer through the current economic challenges.
Deputy governor Ben Broadbent points out that we also faced economic shocks since 2020 due to the Covid-19 pandemic.
“We are facing, and have for some time been facing, these ever-increasing trade-off inducing shocks.
They are intrinsically shocks, which in the near term push up inflation but also weaken growth.”
Bailey: BoE independence is a great virtue
Bailey also gave a full-throated defence of central bank independence, saying it makes it easier to take monetary policy decisions.
“One of the great strengths of being an independent central Bank is actually, you know, the political pressures have been very well managed throughout the life of the MPC in my view.
“And obviously, we’ve had many governments throughout that life, and that is the best way to manage it in my view. So no, I don’t really want to put emphasis on political pressures.
“One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”
Andrew Bailey also declines to comment on Liz Truss’ criticism of the Bank of England (she wants to review if its mandate is fit for purpose).
But Bailey also makes an important point: Under independence, the government sets the Bank of England’s price stability target each year, and the BoE tries to hit it.
That structure is very clear, Bailey says, and it has been reviewed once before [the original goal was to aim for the RPIX inflation measure at 2.5%, but was switched to 2% CPI in 2003]
Onto questions….
Q: If Liz Truss becomes prime minister and makes £30bn of tax cuts, will interest rate need to rise even faster and further?
Andrew Bailey says the Bank will not get involved in the Conservative leadership race, but looks forward to working with the next prime minister, whoever it should be.
[ad_2]
Source link
