Bank Of England Raises Rates Again, Says UK Is Entering Recession: Will The US Fed Follow Suit?

Zinger Key Points
  • The Bank of England has raised its interest rate to 1.75%.
  • Bank leaders believe a recession will last for five financial quarters.

The Bank of England has now raised rates at six consecutive meetings to try and combat the U.K.’s rampant inflation. Its interest rate now stands at 1.75%. 

What Happened: Following Thursday’s meeting, the bank announced a 50-basis-point hike, which is its largest single increase since 1995. The bank is now projecting the U.K.’s longest recession since the global financial crisis, CNBC has reported.

Bank leaders are expecting headline inflation to peak at 13.3% in October and that it will stay at elevated levels for five financial quarters. Leaders have set an inflationary target of 2% but they believe it will not reach that number until 2025.

The Monetary Policy Committee said the labor market has remained tight, but added there is a risk that a “longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.”

Unemployment in the U.K. currently stands at 3.8%, according to the central bank committee. 

The Inflationary Landscape: In a news conference following the announcement, Bank of England Governor Andrew Bailey said the shock of Russia’s war in Ukraine is now the leading cause of U.K. 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,” he added.

Bailey said he recognizes how hard inflation is on people all over the U.K.. He said that there will be “no ifs or buts” shared at a bank meeting and that inflation will eventually come down to 2%.

Following the announcement, the value of the Pound Sterling was down 0.5% against the dollar and the FTSE 100 Index climbed 0.032%.

Will The US Fed Follow Suit? During July’s meeting of the Federal Reserve, Chair Jerome Powell said it is premature to say the U.S. is in a recession due to the strength of the jobs market.

Yet unemployment rates have continued to climb, and with July’s Nonfarm Payroll numbers being released on Friday, that could change.

Also Read: Imminent Rate Hike? A Real Recession? Upcoming Jobs Report Makes All The Difference

Many analysts believe that if Friday’s data falls below estimates, then the Fed Chair will agree that the U.S. is in or heading toward a recession. The data will be released at 8:30 a.m. Aug. 5 and the nation will be on watch to see if America is truly in a recession.

Photo: Courtesy of Kai Pilger on Unsplash.

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