In Spite of a Prolonged Recession, the Bank of England Raises Rates by the Highest Since 1989.
On Thursday, the Bank of England increased interest rates to their highest level since 1989; but issued a warning to investors that borrowing costs would likely grow less than anticipated due to the possibility of Britain experiencing its deepest recession in at least a century.
The BoE’s decision did little to alter the markets’ expectation that the Bank Rate would peak at about 4.7%. Since raising interest rates last month on September 22, the BoE has had to deal with weeks of political unrest and turmoil in the financial markets. The Truss administration unveiled a $52 billion in unfunded tax cuts that investors panned; driving the pound to a record low against the dollar. Therefore, forcing the BoE to support the bond market to aid pension funds.
The BoE was able to start selling bonds from its 838 billion pound stockpile of assets for quantitative easing. Even if interest rates remain at 3%, according to the BoE’s projections, inflation will have fallen below its 2% objective by the middle of 2024.
However, Bailey claimed that the upside-bias of inflation risks was too lopsided; and that it was too dangerous to rule out more rate increases.