The Bank of England said on Thursday it would increase the cost of borrowing by 25 basis points to 1.25% despite fears that rising prices are already squeezing households and weighing on economic growth.
“Bank staff now expect GDP to fall 0.3% in the second quarter as a whole, weaker than expected at the time of the May Report,” the Bank of England said in a statement.
“Consumer confidence has fallen even further, but it seems that other indicators of household spending have remained the same. Some indicators of business sentiment have weakened, although so far they have remained more resilient than the indicators. consumer confidence and consistent with the positive growth of the underlying GDP, “he added. added.
The central bank said three members of its Monetary Policy Committee wanted to raise rates by 50 basis points to 1.5%, which would have been the biggest increase in 27 years, but the other six outperformed them. .
Rising food and fuel prices have plunged millions of Britons into the worst cost-of-living crisis in decades. Annual consumer price inflation rose to 9% in April, the highest since 1992. The Bank of England now expects inflation to rise slightly above 11% in October. Food research firm IDF said in a report on Thursday that the rise in food prices could exceed 15% over the summer. Prohibitions on exports of key products, including Indonesian palm oil, and the Ukrainian war, which has limited exports to the region, are among the factors that have fueled food inflation, according to the ‘report.
The UK economy is in a sad spot. GDP contracted by 0.3% in April, after falling by 0.1% in March, according to data from the National Statistics Office. Production fell in the three main sectors (services, production and construction) for the first time since January last year.
The Bank of England’s decision comes a day after the US Federal Reserve raised rates by 75 basis points to control inflation. This is the Fed’s biggest rise since 1994.
George Buckley, Nomura’s chief economist for the UK and Europe, told CNN Business that it was “understandable” that the Bank of England had decided on a more modest rate hike than its US counterpart.
“The Bank of England [thinks] this current high inflation, in itself, will affect growth and ultimately reduce inflation in the future, ”Buckley said.
“The bank is struggling with rising inflation, but at the same time with the risk of recession, so it is understandable the differences of opinion of the Committee at this time on the scale of hardening required,” he added.
– Nicole Goodkind contributed to the report.