Just days after the Bank of England raised interest rates to a 33-year high, Britain’s chief economist said its tightening monetary policy is likely to continue due to persistent inflation and a recession looming on the horizon.
The Bank of England has already raised the UK interest rate by 75 basis points to 3% — its largest increase since 1989 – as it seeks to curb inflation.
“I think there is more to do – We’ve done some, that’s what we did last week. And there’s still more to do,” said BoE Governor Huw Pill. “At some point, you have to think what level of rate is appropriate.”
Pill also deferred blame for the UK’s economic downturn, saying it’s being “driven by other forces” beyond the central bank’s rapid rate hike cycle.
“It is largely a consequence of the supply shock which is eating into household incomes,” Pill said. “So the challenge for monetary policy is – in an environment where higher energy prices, a deterioration of the terms of trade, an adverse supply shock, is causing a fairly significant slowdown in the economy – to guide demand around that lower path for the economy, in order to get inflation back to target.”
The rising cost of living is plunging the UK into an economic slump
Inflation, driven largely by soaring food prices as well as the energy crunch, is now at a 40-year high of 10.1% — well above the Monetary Policy Committee’s (MPC’s) 2% target.
The Bank of England has warned that the UK could be facing the longest period of recession since records began – forecasting the nation’s economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct.
The Bank of England also predicted inflation would peak at around 11% at the end of this year, while the unemployment rate could hit 6.4% by the end of 2025.
The government is trying to bring core inflation under control through interest rate hikes but the increasing rates add even more pressure to homeowners amid soaring mortgage rates – predicted to rise by more than £800 a year.
Chancellor Jeremy Hunt said the Bank of England’s latest actions are crucial to shoring up the country’s weakening economy.
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible,” said Hunt. “That is why this government’s number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.”
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