Reference to the CFA’s Advocacy Update from August 4, 2022

The Bank of England unleashed its largest rate increase hike in 27 years as it warned the U.K. is heading for more than a year of recession due to soaring inflation. The half-point increase to 1.75 per cent was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed, potentially putting similar hikes on the table for coming meetings.

The move came as officials predicted a U.K. recession will begin in the fourth quarter, and last all the way through next year. That’s the longest slump since the financial crisis. Officials expect the economy to shrink by around 2.1 per cent in total.

The BOE also boosted its forecast for the peak of inflation to 13.3 per cent in October amid a surge gas prices, and warned that price gains will remain elevated throughout 2023. That will sharpen a cost of living crisis that will see real disposable incomes fall more than at any time in around 60 years.

Even after billions of pounds of government support for struggling households, families are set to be around 5 per cent worse off by the end of 2023 with incomes falling both this year and next.

The half-point hike, unprecedented since the BOE gained independence in 1997, is a sign officials are calling time on the era of cheap money and scrambling to keep pace with a wave of global tightening from its international peers.

The BOE forecasts, based on a market path for interest rates that peaks at 3% next year, show the economy contracting about 1.25 per cent in 2023 and a further 0.25% the following year. Unemployment, meanwhile, will climb to 6.3 per cent by 2025.

UK Inflation is expected to peak above 13% later this year, and still be at 9.5 per cent in the third quarter of 2023. After that it will fall rapidly toward the 2 per cent target as the recession saps demand.

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