cloudy.png
Wednesday August 10th, 2022 10:29AM

Bank of England predicts recession at the end of the year

By The Associated Press
Related Articles
  Contact Editor

LONDON (AP) — The Bank of England announced its biggest interest rate increase in 27 years on Thursday as it forecast that the war in Ukraine would fuel further inflation and tip the U.K. economy into a prolonged recession.

Soaring natural gas prices are likely to drive consumer price inflation to 13.3% in October, from 9.4% in June, the bank said. That will push Britain into recession later this year, with economic output declining each quarter from the fourth quarter of 2022 through the fourth quarter of 2023, bank forecasts show.

Those pressures persuaded the bank’s Monetary Policy Committee to boost its key interest rate by 0.5 percentage points, the biggest of six consecutive increases since December. The rate now stands at 1.75%, the highest since the depths of the global financial crisis in late 2008.

Gov. Andrew Bailey defended the move, which will increase borrowing costs for consumers, saying the bank has a duty to control price increases that disproportionately affect the poorest in society.

“I recognize the significant impact this will have and how difficult the cost of living challenge will continue to be for many people in the United Kingdom,’’ Bailey said at a news conference. “Inflation hits the least well-off hardest. But if we don’t act against inflation becoming persistent, the consequences later will be worse.”

Central banks worldwide are struggling to balance efforts to control inflation while minimizing the fallout for economies that were just beginning to recover from the coronavirus pandemic. Higher interest rates increase borrowing costs for businesses and consumers, which tends to reduce spending and ease rising prices. But such moves also slow economic growth.

The inflation picture has worsened in recent months as Russia cut natural gas shipments to Europe in retaliation for the west’s support of Ukraine. That has triggered unprecedented increases in energy prices worldwide.

The Bank of England estimates that gas and electricity bills will eat up an additional 3.5% of household incomes in the period from 2021-2023. That’s five times more than the increase British households experienced during the energy crisis of the 1970s.

Although it was the first major central bank to start raising rates in December, the Bank of England has faced criticism in recent months as its peers began to move more aggressively.

The U.S. Federal Reserve increased its key rate by three-quarters of a point in each of the past two months to a range of 2.25% to 2.5%. The U.S. economy shrank for a second straight quarter in the April through June period, raising fears that the nation may be approaching a recession.

The European Central Bank last month approved a larger-than-expected half-point increase as it targeted persistently high inflation. Recession is also a growing concern in Europe, where falling gas supplies may force factories to reduce operations this winter.

Victoria Scholar, head of investment at interactive investor, said the Bank of England approved a big increase because it didn’t want to fall behind the curve. The real risk is “stagflation,” a prolonged period of economic stagnation combined with rapidly rising prices that can be very difficult to get out of, she said.

“It’s very much doom and gloom from the Bank of England, and not least the fact that it’s decided to carry out this almost double rate hike,” Scholar said.

The central bank’s actions have become an issue in the contest to replace Prime Minister Boris Johnson, who will step down next month. Supporters of Foreign Secretary Liz Truss, the leading candidate to succeed Johnson, said Thursday she would revisit the question of whether the bank should remain independent.

The Bank of England has been independent of government control since 1997. The last time the U.K. increased interest rates by 0.5 percentage points was in December 1994, when rate decisions were still made by the government’s treasury chief in consultation with the central bank governor.

Bailey declined to respond to questions about the bank’s independence, saying he hopes to work closely with whoever becomes prime minister.

The current landscape is especially complicated for central bank policy makers because many of the factors driving inflation are determined by international events beyond their control.

A first wave of inflation was triggered by international supply bottlenecks and increased demand for energy as the coronavirus pandemic began to ease last year. That was followed quickly by Russia’s invasion of Ukraine, which triggered sharp increases in food and energy prices.

Those pressures are expected to dissipate over time, and there are signs that prices for some goods are beginning to fall, the Bank of England said.

But inflation is now becoming embedded in the U.K. economy, with business owners raising prices and workers demanding wage increases to protect their living standards. That is what the central bank is targeting with Thursday’s rate increase.

Inflation is expected to slow to 9.5% in the third quarter of 2023 and drop in line with the 2% target a year later, the central bank forecast.

But Bailey said the uncertainty about these forecasts is “exceptionally large” because there is no way to predict what will happen with energy prices.

“The committee will be particularly alert to any indications of more persistent inflationary pressures and will, if necessary, act forcefully in response.”

  • Associated Categories: Associated Press (AP), AP National News, AP Online National News, Top General short headlines, AP Business, AP Business - Economy, AP Business - Industries, AP Business - Financial Services, AP Business - Utilities
© Copyright 2022 AccessWDUN.com
All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.
Bank of England predicts recession at the end of the year
The Bank of England says the United Kingdom’s economy is projected to enter a recession in the final three months of the year
7:24AM ( 16 minutes ago )
In S. Korea, Pelosi avoids public comments on Taiwan, China
After infuriating China over her trip to Taiwan, U.S. House Speaker Nancy Pelosi has met South Korean political leaders in Seoul
7:16AM ( 23 minutes ago )
Jurors to visit still bloodstained Parkland school building
Jurors in the trial of Florida school shooter Nikolas Cruz are preparing to visit the still-bloodstained building where he murdered 17 people four years ago
7:14AM ( 25 minutes ago )
Associated Press (AP)
China claims 'precision missile strikes' in Taiwan Strait
China says it has conducted “precision missile strikes" in the Taiwan Strait as part of military exercises by its navy, air force and other departments in six zones surrounding the island
5:42AM ( 1 hour ago )
Global shares rise on optimism on economic data, earnings
Global shares are mostly higher as investors welcome encouraging economic data and quarterly earnings reports from big companies
4:52AM ( 2 hours ago )
Bank of England likely to raise interest rates — maybe a lot
The Bank of England is likely to announce its biggest interest rate increase in more than 27 years as it seeks to rein in accelerating inflation driven by the fallout from Russia’s invasion of Ukraine
4:29AM ( 3 hours ago )
AP Business
SE Asia urges US, China to avoid provocation over Taiwan
The Association of Southeast Asian Nations is calling for calm in the Taiwan Strait, urging against any “provocative action” in the wake of a visit to Taipei by U.S. House Speaker Nancy Pelosi that has infuriated Beijing
11:03PM ( 8 hours ago )
Abortion vote in Kansas sparks new hope for Dems in midterms
Democrats are celebrating a stunning victory for abortion rights in Republican stronghold Kansas as proof that the issue could turn back a Republican wave this fall
8:01PM ( 11 hours ago )
Senate backs Finland, Sweden for NATO 95-1, rebuking Russia
U.S. Senators delivered an overwhelming bipartisan vote ratifying NATO membership for Finland and Sweden
7:57PM ( 11 hours ago )
AP Business - Economy
UN chief criticizes `grotesque greed' of oil companies
The United Nations chief is sharply criticizing the “grotesque greed” of oil and gas companies for making record profits from the energy crisis on the back of the world’s poorest people
8:34PM ( 11 hours ago )
EXPLAINER: Does health care law protect emergency abortion?
The Biden administration has filed its first legal challenge to a state abortion ban since the end of Roe v. Wade with a case that could allow hospitals to keep giving women abortion-related medical care in serious medical situations
7:01PM ( 12 hours ago )
NLRB: Mine workers to pay Alabama coal company over $13M
A federal oversight board is ordering the United Mine Workers of America to pay more than $13 million in compensation to an Alabama coal company where members have been on strike for more than a year
4:55PM ( 14 hours ago )
AP Business - Industries
Growing prescriptions help push CVS past Q2 expectations
CVS Health thumped second-quarter expectations and hiked its full-year forecast as growing prescription claims helped balance a drop in vaccinations
10:59AM ( 20 hours ago )
Inflation in Turkey rises to nearly 80%, hitting consumers
Annual inflation in Turkey soared to nearly 80% in July
6:18AM ( 1 day ago )
Stocks slip on Wall Street after another meandering day
U.S. stocks slipped Tuesday as Wall Street’s modest August retreat continued another day
4:32PM ( 1 day ago )
AP Business - Financial Services
OPEC+ boosts oil output by slower pace than previous months
The OPEC oil cartel and its allies have decided to boost production in September by a much slower pace than in previous months
11:11AM ( 20 hours ago )
Wall Street rising at open; PayPal, CVS in focus
Stocks are opening higher on Wall Street Wednesday
9:52AM ( 21 hours ago )
German leader says gas pipeline part is ready for Russia
German Chancellor Olaf Scholz has inspected a turbine at the center of a natural gas dispute and declared Wednesday that “there are no problems” blocking the part’s return to Russia besides missing information from Russia’s state-controlled gas company
9:24AM ( 22 hours ago )
AP Business - Utilities
In S. Korea, Pelosi avoids public comments on Taiwan, China
After infuriating China over her trip to Taiwan, U.S. House Speaker Nancy Pelosi has met South Korean political leaders in Seoul
7:16AM ( 24 minutes ago )
Jurors to visit still bloodstained Parkland school building
Jurors in the trial of Florida school shooter Nikolas Cruz are preparing to visit the still-bloodstained building where he murdered 17 people four years ago
7:14AM ( 26 minutes ago )
US says Russia aims to fabricate evidence in prison deaths
U.S. officials believe Russia is working to fabricate evidence concerning last week’s deadly strike on a facility housing prisoners of war in a separatist region of eastern Ukraine
7:11AM ( 29 minutes ago )
Munich's Oktoberfest finally back on after pandemic pause
Germany's annual Oktoberfest festival is finally on again for this fall, following a two-year hiatus due to the coronavirus pandemic
7:05AM ( 35 minutes ago )
Bank of England raises rates by half-point to tame inflation
The Bank of England has raised interest rates by half a percentage point as it seeks to tame accelerating inflation driven by the fallout from Russia’s invasion of Ukraine
7:04AM ( 37 minutes ago )