Great Britain | The Bank of England decided on the biggest increase

Bank of England. Photo source: Financial News.

Reading time: 2 minutes

The Bank of England (BoE) decided on Thursday to increase the monetary policy interest rate by 50 basis points, the largest interest rate increase since 1995, even though it expects a long recession, reports Reuters, quoted by TVR.

The nine members of the BoE’s monetary policy committee voted 8 to 1 to raise the benchmark interest rate from 1.25% to 1.75%, the highest level of the base rate since late 2008.

This increase in the cost of credit by 50 basis points decided by the BoE was expected by most economists interviewed by Reuters, as central banks rush to increase the cost of credit in order to keep the price explosion under control.

The Bank of England opted for the biggest interest rate hike since 1995 even as it warned that Britain was facing a recession that would wipe 2.1% of GDP, a similar decline to that of the 1990s but smaller than the blow from the COVID-19 pandemic or the one caused by the global financial crisis of 2008-09. According to the BoE, the British economy would begin to contract in the last quarter of this year and continue to contract throughout 2023, which would mean the longest recession since the global financial crisis.

In total, the Bank of England has raised the cost of borrowing six times since December, but Thursday’s hike is the biggest since 1995. Pressure on Governor Andrew Bailey and his colleagues has intensified after recent rate hikes by The American Federal Reserve, the European Central Bank and other central banks.

The Bank of England has reiterated that it is prepared to act forcefully, if necessary, to respond to inflationary pressures. In June, the consumer price index in Great Britain rose to 9.4%, the highest level in the last 40 years, more than four times above the 2% target envisaged by the BoE. According to the latest forecasts, the consumer price index is expected to peak at 13.3% in October, and will not return to a level of 2% until two years from now, as the recession takes its toll on demand.