On December 16, 2021, a pedestrian walks past the Bank of England in London. TOLGA AKMEN AFP LONDON -- The Bank of England raised interest rates by the most in 27 years on Thursday despite warnings that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13 percent.
The BoE's Monetary Policy Committee voted on 8 -- 1 for a half percentage point rise in Bank Rate to 1.75 percent its highest level since late 2008 from 1.25 percent, due to a surge in energy prices caused by Russia's special military operation in Ukraine.
The 50 basis-point increase was predicted by most economists in a Reuters poll as central banks around the world struggle to contain the surge in prices.
The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1 percent, similar to a slump in the 1990s, but far less than the hit from COVID 19 and the downturn caused by the 2008-09 global financial crisis.
BoE raises rates above crisis lows, signalling no rush for a hike next hike.
The economy would begin to shrink in the final quarter of 2022 and contract throughout the year 2023, making it the longest recession since the financial crisis.
Consumer price inflation was expected to peak at 13.3 percent in October, the highest since 1980, due to the surge in energy prices.
The biggest squeeze since these records began in 1964 would result in households facing two consecutive years of decline in disposable incomes.
In June British consumer price inflation hit a 40-year high of 9.4 percent, more than four times more than the BoE's 2 percent target, triggering industrial action and putting pressure onwhoever succeeds Boris Johnson as Britain's next prime minister to come up with further support.
The BoE had previously predicted inflation to peak at over 11 percent and almost no growth in Britain's economy before 2025 at the earliest.
The BoE saw inflation fall to 2 percent in two years as the economy took its toll on demand, as it forecasts that inflation would fall back to 2 percent.
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Since December, the British central bank has raised rates six times, but Thursday's move was the biggest since 1995.
The pressure on Governor Andrew Bailey and colleagues to move in larger steps increased after recent hikes in the US Federal Reserve, the European Central Bank and other central banks.
The value of the pound was weakened by those moves, which can add to inflation.
The BoE said it was ready to move forcefully if needed to stem more persistent inflationary pressures.
It stressed that there were enormous uncertainties about the economy that could make the slowdown more severe than its core forecasts and it would judge what its next moves would be as events unfold.
The BoE said that policy is not on a pre-set path. The Committee's assessment of the economic outlook and inflationary pressures will reflect the scale, pace and timing of any changes to the Bank Rate. The BoE's inflation-fighting record has been called into question by Liz Truss, the front-runner to be Britain's next prime minister.
She wants to set a clear direction of travel for monetary policy and to review the BoE's mandate.
The BoE expects to sell its huge stock of government bonds soon after its next meeting in September, with active sales of around 10 billion pounds a quarter.
In December, the gilt holdings were at 875 billion pounds and fell to 844 billion pounds after the BoE stopped investing the proceeds of maturing bonds in February.