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Big hike in UK interest rates - recession awaits

Big hike in UK interest rates – recession awaits

The increase was expected. According to analysts polled by Bloomberg, 80 percent believe there is a twofold increase.

At the same time, the central bank presents a bleak outlook for the future.

“The UK is expected to enter a recession from the fourth quarter of this year,” she wrote in an accompanying report.

Real household incomes are expected to fall sharply this year and in 2023, and consumption growth will be negative.

The Bank of England has consistently raised interest rates by 25 basis points several times since last December.

wrong judgments

UK inflation hit 9.1% in June – the highest level in more than 40 years. Then the country’s central bank announced that it expects inflation to exceed 9 percent in the coming months and may reach around 11 percent in October.

The central bank is now presenting a new inflation forecast of 13 percent in the fourth quarter. They then believe that inflation will remain at high levels until 2023, before returning to the 2 per cent target the following year.

But the central bank miscalculated several times its inflation forecast. In February, inflation of around 7 percent was expected in June of this year, and at the beginning of last year, inflation today was forecast to be around 2 percent.

Earlier on Wednesday, the UK released construction PMI numbers for July, which showed it contracting for the first time in more than a year and a half. Bloomberg analysts expected weak growth.

Politics has an effect

At the same time, the domestic political climate in Great Britain can complicate the work of the Bank.

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Conservative candidates Liz Truss and Rishi Sunak are currently battling over who will be Britain’s next prime minister, and both have widely differing views on where taxes and borrowing levels should be. This may require different reactions from the central bank.

Truss promised instant tax cuts to both individuals and businesses. According to economists polled by Bloomberg, this could contribute to stimulating the economy — but also persistently high inflation, which in turn could cause the central bank to act more aggressively and raise interest rates further.