Bank of England lifts rates by another 50 basis points

on Sep 22, 2022
  • Bank of England says the United Kingdom is already in a recession.
  • Central bank now forecasts inflation peaking at close to 11% in October.
  • The blue-chip FTSE 100 index ended more than 1.0% down on Thursday.

FTSE 100 ended in the red on Thursday after the Bank of England raised its key rate by another 50 basis points.

Energy prices might see a relief

Many had expected a bigger increase but the central bank voted for 50-bps after inflation, in August, dipped slightly to 9.9% (detailed here). Evidently, though, it remains well above the 2.0% target.

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BoE said the government directed caps on energy bills will likely help with energy prices – the largest component of inflation given the Ukraine situation. Still, it warned:

While energy subsidy reduces in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period.

The blue-chip index, nonetheless, is down 4.0% (year to date) only.

U.K. is already in a recession

According to the Bank of England, the United Kingdom is already in a recession. It now forecasts the economy to contract by 0.1% this quarter versus its previous expectation of a 0.4% growth instead.

The second quarter of 2022 was already one of negative GDP (down 0.1%). BoE now sees inflation peaking at close to 11% in October – down from 13% it had predicted earlier. Still, it added:

There have been more signs of continuing strength in domestically generated inflation since August. The labour market is tight and domestic cost and price pressures remain elevated.

The central bank did not signal the path forward and said the future monetary stance will be based on the economic news moving forward. Also this week, Sterling tanked to a new multi-decade low against the U.S. dollar.  

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