Bank of England hikes interest rates and warns UK to enter recession with inflation to pass 13% – as it happened

UK to enter recession, Bank of England warns

The Bank of England is also warning that the UK economy will enter recession later this year.

The Bank has cut its growth forecasts, and now sees the economy falling into recession from the October-December quarter.

In a grim warning about the economic outlook, it says:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

NEW: 🚨

*Bank of England raises interest rates by 0.5% to 1.75%, biggest rise in 25 years,
*as it predicts an even higher peak in inflation of 13 (THIRTEEN) %

🚨 Bank predicts recession starting this year lasting as long as financial crisis (5 quarters), as deep as 1990s

— Faisal Islam (@faisalislam) August 4, 2022

The Bank of England has hiked interest rates to 1.75% this lunchtime and has predicted five consecutive quarters of recession. Meanwhile, both the prime minister and leader of the opposition are on holiday…

— Sophie Morris (@itssophiemorris) August 4, 2022

Key events

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Closing post

Time to wrap up, with a quick summary

The Bank of England has warned that the UK will start falling into a recession that will last over a year, as soaring energy prices continue to hammer the economy.

The BoE forecast the UK economy would shrink in the last quarter of this year, and steadily through 2023, the longest downturn since the 2008 financial crisis, in a grim economic outlook.

UK GDP is expected to fall by 2.1% from peak-to-trough, similar to the recession of the early 90s.

Consumer price inflation is now set to hit 13% per year once the energy price cap is lifted later in October. And households face a very painful two-year fall in real incomes, with wages not expected to keep up with prices.

‘An uncomfortable situation’: Bank of England says UK will enter recession – video

The Bank warned:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Despite the looming recession, the Bank voted 8-1 to raise interest rates to a new 13-year high.

Bank Rate is being hiked by 50 basis points, the biggest upward move since 1995, as the Bank tries to avoid inflation becoming embedded.

UK interest rate rises

Governor Andrew Bailey insisted that the BoE has to battle inflation, as the poorest will suffer most.

“If we don’t act, inflation will become more embedded, it will get worse and we will have to raise interest rates by more — we have to act if we’re going to stop that.”

He told reporters in London that the rise in gas prices due to the Ukraine war was the main factor driving up inflation.

“There is an economic cost to the war.

“But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target.”

Unions argued that companies should rein in their profits, rather than pumping up inflation through higher prices, and give workers the pay rises they need.

Economists have predicted that rates will keep rising, with another 50-basis rise in September possible.

The Bank faced criticism over its handling of inflation, which is already more than four times its 2% target.

Attorney General Suella Braverman said Liz Truss would review the Bank’s mandate if she become prime minister, including its “entire exclusionary independence over interest rates”.

Bailey defended Bank independence, saying:

“One of the great strengths of being an independent central Bank is actually, you know, the political pressures have been very well managed throughout the life of the MPC in my view.

“And obviously, we’ve had many governments throughout that life. That is the best way to manage it in my view. So no, I don’t really want to put emphasis on political pressures.

“One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”

That independence is under more threat than ever before, our economics editor Larry Elliott warns:

Here’s our latest story on the Bank’s recession warning:

And here’s an explanation on the impact on consumers:

Bank of England Governor Andrew Bailey rejected the suggestion that Britain was suffering a sterling crisis, and said recent moves in foreign exchange markets were better understood as a period of dollar strength.

“It is not a crisis in my view at all,” he told Bloomberg TV.

“When you look across currencies, the common theme is the strength of the dollar,” he added.

Sterling has weakened by around 10% against the U.S. dollar so far this year, but is broadly flat against the euro (which fell below parity against the dollar last month).

Economists are predicting that UK interest rates will continue to rise in the months ahead.

Morgan Stanley warns there is a very high risk of a string of 50bp hikes, followed by aggressive cuts next year.

For now, it is sticking with forecasts of 25bp rises in September (to 2%) and November (to 2.25%), followed by a cut a year later.

Morgan Stanley says:

As globally, we see central banks pivoting over 4Q22, we see a dovish November meeting and a final 25bp hike then. We now introduce a cut at the end of next year, at the November meeting.

ING Developed Markets Economist James Smith agrees that another 50-basis point hike in September is ‘very plausible’.

“The fact that the Bank is stepping up the pace of rate hikes while also forecasting a meaningful recession shows just how worried it is that worker shortages and supply issues could keep inflation elevated even as the economy weakens.

“In other words, it’s the supply side of the economy – much more so than what’s happening with demand – that will heavily determine when and after how many more hikes the BoE will stop tightening. The Bank will want to see signs that skill shortages are easing and that wage pressures are showing signs of abating.

“Given that only one official dissented on the decision, and the fact that the Bank reiterated its willingness to act ‘forcefully’ to curb inflation, we think there’s a strong possibility of another 50bp hike in September – particularly if that’s what both the Fed and ECB end up doing too.”

Rail union TSSA has announced that members at Network Rail will join the strike action later this month in their dispute over pay, job security and conditions, meaning further disruption to services.

The walkouts by thousands of members in General Grades and Controllers will take place on Thursday 18 and Saturday 20 August after the union formally served notice to NR.

The RMT is already holding strike action those days, involving workers at Network Rail and 14 train operators on Thursday 18 and Saturday 20 August.

TSSA General Secretary Manuel Cortes says:

“Our union has a strong mandate for strike action at Network Rail in these grades and walkouts will have a huge impact.

“Our members are simply asking for basic fair treatment: not to be sacked from their jobs, a fair pay rise in the face of a cost-of-living-crisis and no race to the bottom on terms and conditions.

“No one takes strike action lightly, but we have been left with little choice. Our General Grades and Controllers are a force to be reckoned with. Without them the rail network does not run, it is that simple.

Today we served notification to Network Rail (NR) that members will take strike action on Thursday 18 and Saturday 20 August in our dispute over pay, job security and conditions.

— TSSA (@TSSAunion) August 4, 2022

More rail workers are to strike later this month in worsening disputes over pay, as unions seek wage increases to help workers cope with soaring.

Unite announced that its members employed by Network Rail as electric control room operatives, will join other rail unions in taking action on August 18 and 20.

The union said the electric control room operatives play a crucial role as they are responsible for managing and controlling the power supply to the rail network.

Unite general secretary Sharon Graham said:

“Our members played a crucial role in keeping the rail network functioning throughout the pandemic, ensuring that essential workers and goods could be transported.

“The thanks they get for their sacrifices from their employers is a derisory offer that amounts to a kick in the teeth.

The workers are based at the control rooms in Brighton, York, Paddock Wood, Raynes Park, Romford, Selhurst Road and York.

The possibility of strike action on Scotland’s railway has become more likely after union members rejected a pay deal.

The RMT union – whose members include ticket examiners, conductors and station staff – said on Thursday that 60% of members who voted in a ballot rejected a deal that would increase pay by 5% and create a revenue sharing programme.

According to the Scotsman, RMT organiser Mick Hogg said failure to reach a better deal during meetings next week could result in a ballot for strike action.

As recession looms, the Bank of England’s independence is under threat

Governor of the Bank of England, Andrew Bailey
Governor of the Bank of England, Andrew Bailey Photograph: Reuters

Politically, the Bank has rarely been in a tighter spot, our economics editor Larry Elliott writes:

Today’s 0.5 point increase in interest rates is a clear case of playing catchup, but is being imposed at a time when the economy is weakening.

If the MPC is too aggressive with future interest rate rises it will be blamed for making the recession worse. If inflation proves harder to shift than it expects, it will be blamed for doing too little too late.

Liz Truss, the frontrunner to replace Boris Johnson as prime minister, has been openly critical of Threadneedle Street, effectively accusing the MPC of being asleep at the wheel as the cost of living crisis erupted.

For the first time since it was granted the freedom to set interest rates by Gordon Brown in 1997, the Bank’s independence looks to be under threat.

Here’s Larry’s full analysis.

Britain’s Unite trade union has negotiated a £2,300 cost-of-living payment that will cover 2,730 workers at U.S. truck engine maker Cummins.

It’s a timely example of how some companies are choosing to help their workers get through the cost-of-living crisis.

Unite says:

“The payment was agreed after Unite reps at the company raised the severe problems that workers were having with making ends meet as a result of rampant inflation.”

Via Reuters.

Ian Mills, partner at consultancy Barnett Waddingham, says pensioners on inflation-linked defined benefit schemes may not see their benefits rise fully in line with inflation, as increases could be capped at 5%.

That could be unexpected, and unwelcome, news for them:

Members of some pension schemes who thought they had an index-linked income may be surprised to discover that their increases are limited – with 5% being a typical cap.

Effectively, these people could be in for an 8% cut in their incomes in real terms, which will further exacerbate the cost of living crisis.

“From a scheme perspective, such high inflation can actually be a good thing. Schemes which have capped increases may find that their inflation-linked assets outperform, and that their funding positions improve accordingly.

Citizens Advice Scotland: people likely to die due to this crisis

Some families will have to choose between freezing or starving this winter, warns Citizens Advice Scotland.

Derek Mitchell – the chief executive of Citizens Advice Scotland – says “radical action” from government is needed, following today’s warning that inflation will jump above 13% soon, and remain high through next year.

Mitchell said:

“Soaring inflation means higher prices in the shops and costs on bills for people already struggling badly with the cost-of-living crisis.

“That inflation is expected to stay high for much of 2023 and the looming prospect of a recession means this crisis isn’t going anywhere, risking a legacy of debt, poverty and destitution for years and years to come.

“Some of the most vulnerable people across the UK this winter will face a choice between freezing and starving.

“That’s the reality and we should not pretend otherwise. People are likely to die this winter because of this crisis unless we see urgent and radical action from policymakers.”

Sarah Butler

Sarah Butler

Hundreds of Amazon employees have stopped work at the online retailer’s warehouse in Tilbury in Essex in response to a pay rise of only 35p – about 3% – far below inflation as it heads towards 13% later this year.

The GMB union said about 700 of the roughly 3,500 employees at the site, which is one of Amazon’s largest in Europe, gathered in the facility’s canteen for a meeting as they tried to register a protest against the pay deal.

It is understood workers at the facility earn a minimum of £11.10 an hour with those employed for at least three years on a minimum of £11.35. They are calling for a £2-an-hour raise but both groups are being offered the 35p deal.

One worker inside the warehouse posted a video in which they accused Amazon of treating them “like slaves”. “See people what’s going on,” the post on TikTok said. “Keep fight for us and our family”.

Steve Garelick, a regional organiser at GMB, said some workers had faced disciplinary action and a withdrawal of pay over the stoppage that began on Wednesday night and continued into Thursday.

HR at Amazon have removed pay from hundreds of workers at Tilbury Essex as well as scouring Social media to see who is uploading videos. Instead of disciplinary procedures because of reputation .@AmazonUK should sort their reputation with staff. Pay a decent increase not 35p

— Steve Garelick (@steve_garelick) August 4, 2022


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