A two-year recession threatens the UK

The Bank of England raises its key rate to 3% but warns of a prolonged economic crisis for the country.

The UK It has already entered recession and will not come out of it before mid-2024, meaning a two-year decline in activity, which could reduce GDP by 2.9%, according to the latest projections from the Bank of England (BoE). As a result, unemployment may rise from 3.5% currently to 6.4% in 2025. It would be the longest recession in the country’s history, less deep than the 2020 Covid or the 2008 financial crisis.

These bleak prospects did not deter the Bank’s monetary policy committee from voting, on Thursday, for the biggest one-shot increase in its key rate in thirty-three years, by two to seven votes. From 2.25% to 3%, the highest since 2008. With this 0.75 point increase, the BoE follows in the footsteps of the Fed, which raised rates by the same amount for the fourth time in a row the previous day. “If we don’t act forcefully now, it will only get worse later.” This will be the eighth consecutive rate hike from December 2021, justified Bank of England Governor Andrew Bailey.

However, the tone differs in the next steps. If US Federal Reserve Chairman Jay Powell showed his determination to continue the forced march on rate hikes, even more than markets expected, his British stock markets estimated that British prices would rise less than expected. . That means a final rate of 5.25% next year, which will contribute to this scenario of a two-year recession. On the other hand, he said, if rates rise less, the contraction in the economy will be of less magnitude and duration.

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The prospect sent the British pound tumbling, losing up to 2% against the dollar and 1% against the euro by midday.

Fix the ‘mini-budget’ damage of Liz Truss

The only relatively “good” piece of news in this panorama is that inflation in Great Britain rose to 10.9% in October, according to the Bank of England. 10% in the first quarter of 2023 and then fall further to 11% by the end of the year. In the event of a hard and prolonged recession, it could fall below the 2% target in two years. The Bank of England had to make its forecasts somewhat blind, pending the government’s budget decisions, which were postponed until November 17. These include tax hikes and big cuts in public spending, which could worsen the economy’s recession.

Rishi Sunak’s government must repair the “mini-budget” damage caused by Liz Truss and her chancellor Kwasi Kwarteng at the end of September. The Bank of England had to intervene urgently as unfunded £45bn tax cuts sent bond markets into a storm. Returning to this chapter, Andrew Bailey notes that there is a “Premium UK” Risk on UK interest rates (financial markets “The Fool’s Gift”), because of these dangerous policies. “There are questions about British politics that will have a lasting effect. He agreed. We have to work very hard to turn this page. »

After being forced to buy sovereign bonds to avoid a crash, the Bank of England resumed on 1R In November, the sale of assets accumulated during the Covid crisis in the name of “quantitative easing”. It was the first major central bank to introduce the reverse approach of “quantitative tightening”, which reduced its balance sheet by £875 billion. The first tranche of 750 million pounds of British bonds was sold in the markets on Tuesday.

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