Bank of England hikes rates by most since 1989 even

Bank of England hikes rates by most since 1989 even as protracted recession looms UK

  • Central Bank raises interest rates from 2.25% to 3%
  • The BoE tells investors its rate hike bets look too big
  • Sterling falls nearly 2% against the US dollar
  • New forecasts assume a recession lasting until 2024
  • Government to present financial plans on November 17th

LONDON, Nov 3 (Portal) – The Bank of England on Thursday hiked interest rates the most since 1989 but also warned Britain was facing a long recession and told investors borrowing costs were less likely to rise would than expected.

The BoE hiked interest rates to 3% from 2.25% despite saying the UK economy might not grow for the next two years, a longer slump than during the 2008-09 financial crisis.

The pound fell sharply, falling about 2% against the US dollar at 1315 GMT, hitting its lowest level since mid-October when Britain was mired in a political crisis sparked by former Prime Minister Liz Truss’ tax cut plans.

On Wednesday, the Federal Reserve also raised interest rates by 75 basis points, but signaled that US borrowing costs were likely to rise more than expected in a bid to dampen inflation.

This was in contrast to the BoE’s message on Thursday.

“We can’t make any promises about future interest rates, but based on where we are today, we believe interest rates need to rise by less than what financial markets are currently pricing in,” Gov. Andrew Bailey said in an unusually blunt message.

Portal GraphicsReuters Graphics Portal Graphics

The BoE said it now expects inflation to hit a 40-year high of around 11% in the current quarter. But she also believes the economy has entered a recession, which could mean it will contract in both 2023 and 2024, contracting 2.9% overall.

Unemployment would rise steadily to 6.4% by the end of 2025, almost doubling from the current 3.5%, its lowest level since the mid-1970s.

Thursday’s rise in borrowing costs – the biggest in 33 years barring a failed attempt to support the pound on Black Wednesday 1992 – was in line with economists’ expectations in a Portal poll, but was not unanimous.

Two policymakers, Silvana Tenreyro and Swati Dhingra, voted for smaller increases of a quarter and half a percentage point, respectively.

The majority of the nine-member Monetary Policy Committee said rates need to go higher, although likely not as high as the 5.2% priced into financial markets when the BoE finalized its forecasts.

[1/2] A general view of the Bank of England (BoE) building, which confirmed the BoE would hike interest rates to 1.75% in London, UK on August 4, 2022. Portal/Maja Smiejkowska/File Photo

“Further interest rate hikes may be needed for inflation to return to target on a sustainable basis, albeit to a peak lower than what financial markets have priced in,” the BoE said, offering unusually specific guidance to investors.

Earlier Thursday, markets were expecting interest rates to peak at around 4.75%. Following his announcement, that peak had fallen below 4.7% by September of next year.

“The Committee remains confident that if the outlook points to more persistent inflationary pressures, it will respond vigorously as necessary,” the MPC added, echoing its previous guidance.


Central banks across the western world are responding to similar challenges. Inflation has skyrocketed over the past year due to labor shortages and supply chain bottlenecks since the COVID pandemic and – in the case of Europe – a sharp rise in energy bills since Russia invaded Ukraine in February.

New UK Treasury Secretary Jeremy Hunt said “the government’s top priority is to get inflation under control and today the Bank took action consistent with its objective of bringing inflation back to target”.

The BoE has seen weeks of political and financial market chaos since its last rate hike on September 22nd.

Just a day later, then-Prime Minister Truss’ government unveiled an unfunded package of £45 billion ($52 billion) tax cuts, which drew a scathing reaction from investors, sending sterling to record lows against the dollar squeezed and forced the BoE to prop up the bond market to help bond funds.

Truss had to resign after 44 days in office.

Markets are now more stable and the UK government’s borrowing costs are broadly back to pre-turmoil levels. On Tuesday, the BoE was able to start selling bonds from its £838 billion quantitative easing stash.

BoE policymaking is made particularly difficult by a lack of clarity about future government policy.

While most of Truss’ tax cuts have been reversed, new Prime Minister Rishi Sunak has hinted there will be a shortage of public spending and possibly higher taxes, the extent of which will not become clear until a November 17 financial statement.

(This story has been corrected to change from common to uncommon in paragraph 6.)

writing by David Milliken and William Schomberg; Editing by Catherine Evans

Our standards: The Trust Principles.