UK to enter recession as inflation soars over 13%, Bank of England warns – business live

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.

Updated at 07.18 EDT

Key events

Filters BETA

Key events (11)Bank of England (23)UK (16)MPC (9)Andrew Bailey (8)Liz Truss (5)

Inflation hits the least well-off hardest, Andrew Bailey points out.

If the Bank doesn’t act to stop inflation becoming persistent, the consequences will be worse in future, meaning interest rates need to be higher, the governor tells the press conference at the BoE.

[However, higher interest rates will not bring wholesale gas prices, the major driver of inflation, down to pre-Ukraine invasion levels].

Looking ahead, Bailey says all options will be on the table when the MPC meet again in September.

IE: we shouldn’t assume interest rates will rise by another 50 basis points at the next meeting too.

Unemployment is expected to rise from next year, Andrew Bailey warns.

The Bank also forecasts that wage pressure will adjust down quickly as inflation falls back (from over 13% by the end of this year).

The mix of high near-term inflation and weak activity is a ‘challenging backdrop’ to seting interest rate, he says.

But there are ‘no ifs or buts’ in the Bank’s commitment to getting inflation back to the 2% target in the medium term.

BoE governor: Russian shock now largest contributor to UK inflation

Bank of England governor Andrew Bailey is holding a press conference now, to explain today’s interest rate rise.

Bailey points out that near term inflationary pressures have intensified significantly, due to the surge in energy prices since the Bank’s previous forecasts in May.

The Russian shock is now the largest contributor to UK inflation by some way.

There is an economic cost to the war….but it will not deflect us from setting monetary policy to bring inflation back to the 2% target.

Pound hit by recession warning

The pound has dropped after the Bank of England warned the UK will fall into a long recession.

Sterling is now down half a cent at $1.2090, having been up half a cent earlier.

You might expect a hefty interest rate rise to support a currency, but not when it’s accompanied by such a worrying assessment of the economic outlook:

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, explains:

“Sterling has fallen fairly sharply against its major peers so far this afternoon following a very doom and gloom assessment of the UK economy from the Bank of England. The vote on interest rates was actually rather hawkish, with eight of the nine MPC members in support of an immediate 50 basis point rate increase. Silvana Tenreyro was the lone dissenter in favour of a standard 25 basis point hike.

“The BoE’s communications and accompanying macroeconomic projections were, however, very downbeat. We’ve run out of fingers and toes keeping track of the number of occasions that the MPC has revised upwards its inflation forecasts in the past year. UK headline inflation is now expected to peak at 13.3% in October, and remain just shy of double-digits in twelve months time.

Of particular concern is the bank’s appraisal on the impact of the cost of living crisis on economic activity. Policymakers now expect the UK economy to contract throughout all of 2023, with a peak-to-trough fall of more than 2%. This is a far sharper downturn than market participants had accounted for, hence the initial knee-jerk sell-off in the pound.

Updated at 07.37 EDT

The Bank hiked interest rates to 1.75% (even though the UK economy is heading into recession), because it fears inflationary pressures are becoming “more persistent and broadening”.

It points out that many companies have been successfully raising prices* which will push up consumer costs in the shops.

The Bank also points to the UK’s ‘tight’ labour market — a signal that it is worried about a wage-price spiral, as workers seek pay rises to help with the worst cost of living crisis in decades.

The Bank says:

In a tight labour market and an environment in which companies were finding it easier to pass on price increases, a higher and more protracted path for CPI inflation over the next 18 months could increase the risk that an eventual decline in external price pressures would not be sufficient to restrain expectations of above-target inflation further ahead.

It argues that faster tightening will being inflation down to 2% quicker:

[* for example Unilever, Heinz and Reckitt Benckiser].

The Bank forecast that the UK economy will start shrinking in the fourth quarter of this year, and then keep contracting through next year.

That would be the longest recession since after the 2008 financial crisis.

Output would fall by 2.1% from peak-to-trough during this recession, similar to the 1990s recession, and smaller than after the ‘08 crash.

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.

Updated at 07.18 EDT

Inflation to hit 13% later this year

UK inflation is set to soar over 13% by the end of this year, the Bank warns, and remain elevated in 2023.

Announcing today’s interest rate decision, it says the surge in gas prices mean inflation will be even higher than previously feared.

Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.

As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.