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Bank of England raises rates to 2.25%, despite likely recession

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LONDON, Sept. 22 (Reuters) – The Bank of England raised its key interest rate from 1.75% to 2.25% on Thursday and said it would continue to respond strongly to inflation “if necessary” despite the economy being in recession ends up.

The BoE estimates that the UK economy will contract 0.1% in the third quarter – partly as a result of the extra public holiday for Queen Elizabeth’s funeral – which, combined with a production decline in the second quarter, fits the definition of a technical recession.

Economists surveyed by Reuters last week had predicted a repeat of the half-point rate hike in August, but financial markets had bet on a three-quarter gain, the largest since 1989, save for a brief, failed attempt in 1992 to break sterling. to support.

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The BoE move follows Wednesday’s decision by the US Federal Reserve to raise its key interest rate by three-quarters of a percentage point as central banks worldwide grapple with post-COVID labor shortages and the impact of Russia’s invasion of Ukraine on energy prices.

“Should the prospects point to more sustained inflationary pressures, including through stronger demand, the commission will react strongly if necessary,” the BoE said, in the same format as its policy proposals in previous months.

The BoE’s Monetary Policy Committee voted 5-4 to raise interest rates to 2.25%, with Vice Governor Dave Ramsden and outside MPC members Jonathan Haskel and Catherine Mann voting for an increase to 2.5%, while new MPC member Swati Dhingra wanted a smaller increase to 2. %.

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The MPC also voted unanimously to cut the BoE’s £838 billion in government bonds by £80 billion over the next year, through bond maturing and active sales, which kick off next month. This is in line with the target set in August.

The BoE now expects inflation to peak at just under 11% in October, below the 13.3% peak forecast last month, before Liz Truss won the Conservative Party leadership and became Britain’s prime minister. was promised to cut energy rates and lower taxes.

Inflation is expected to remain above 10% for several months after October before falling, the BoE said.

Consumer price inflation fell to 9.9% in July, from a 40-year high of 10.1% in August, the first decline in nearly a year.

On Friday, new finance minister Kwasi Kwarteng will provide more details on the government’s fiscal plans, which could amount to more than £150 billion in stimulus measures.

The BoE said it would assess the implications for monetary policy at its November meeting.

However, it noted that while the energy price cap would reduce inflation in the near term, it would add further pressure.

Before the interest rate decision, financial markets expected the BoE to raise interest rates to 3.75% by the end of the year, peaking at 5% in mid-2023. Less than a year ago, the BoE rate stood at an all-time low of 0.1%.

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The pound fell to its lowest level since 1985 against the US dollar following Wednesday’s Fed decision, although it has held up better against the euro.

(This story corrects the planned reduction of the gold in paragraph 7 to 80 billion pounds from 100 billion pounds)

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Reporting by David Milliken; adaptation by Farouq Suleiman

Our Standards: The Thomson Reuters Trust Principles.

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