Bank of England hikes rates to 13-yr high, warns of rising recession risk

The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10 per cent as it raised interest rates on Thursday to their highest since 2009, hiking by quarter of a percentage point to 1 per cent.

The pound fell by more than a cent against the US dollar to hit its lowest level since mid-2020, below $1.24, as the gloominess of the BoE’s new forecasts for the world’s fifth-largest economy caught investors by surprise.

They also trimmed bets on the central bank hiking rates aggressively this year. Short-dated British government bond yields slid sharply.

The BoE’s nine rate-setters voted 6-3 for the rise in Bank Rate from 0.75 per cent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25 per cent.

Officials also said they would consider beginning the process of actively selling bonds purchased under quantitative easing, a milestone for the policy which began over a decade ago. No major central bank has yet conducted active sales of government bonds.

Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia’s invasion of Ukraine sent energy prices spiralling.

The BoE said it was also worried about the impact of renewed Covid-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.

“It is a very weak projection, a very sharp slowdown,” BoE Governor Andrew Bailey told reporters. “There’s a technical definition of a recession it doesn’t meet — but put that to one side — it is a very sharp slowdown in activity.”