by Jonathan Capel

LONDON (Reuters) – The Bank of England will add another 50 basis points to its bank rate next week and cut borrowing costs to 3.50%, even though the economy has entered a recession as it battles inflation that has reached more than five times its target, according to Reuters. Survey found.

As in much of the world, inflation in Britain has been rife, spurred by rising energy costs in the wake of the Russian invasion of Ukraine which has also led to further disruption to supply chains still recovering from the coronavirus pandemic.

Prices rose 11.1% in October compared to a year earlier, the largest increase in 41 years. This has added to consumers’ woes as they are also facing a record hit to living standards after the government introduced a tough budget to try to restore Britain’s financial reputation.

The country faces a winter of discontent as workers from railway clerks to teachers and nurses go on industrial strike to demand better wages.

Swati Dhingra, who is responsible for setting interest rates at the Bank of England, said in an interview published on Saturday that higher interest rates could lead to a deeper and longer recession, adding that there are few indications that demands for higher wages risk deteriorating wages and their prices.

The Bank of England was one of the first major central banks to start unwinding the ultra-loose policy adopted globally during the pandemic, and it went for a 75 basis point hike last month but was expected to add 50 basis points on December 15 according to all but two. 54 economists surveyed Dec. 5-7.

“Almost a year to the day the Bank of England started this tightening cycle, it looks like it’s going to deliver another rally at Christmas,” said HSBC’s Elizabeth Martins.

“We think it would be a 50 basis point hike, taking the bank rate to 3.50%, with risks weighted towards a larger 75 basis point move, rather than a smaller 25 basis point move.”

Only two economists expect a 75 basis point increase next week compared to 13 of 56 in the November 23 poll.

A separate Reuters poll found that the US Federal Reserve is also expected to turn around a 50 basis point move this month after four consecutive increases of 75 basis points.

After next week’s move, the Bank of England will add another 50 basis points in the first quarter and 25 basis points in the second quarter, with averages showing that the bank rate peaked at 4.25% at that time. Projections for the final interest rate ranged from 3.50% to 4.75%.

In last month’s poll, the bank rate was expected to peak at 4.25% in the next quarter, and there was a big split among economists in the latest poll over when and where it would equalize.

cold winter

Britain is almost certainly headed for recession, with economists giving an average chance of 85% of recession within a year.

Quarterly forecasts say the economy contracted by 0.2% last quarter and will do so by 0.4% this quarter, meeting the technical definition of a recession. Then it will contract by 0.4%, 0.4% and 0.2% in the first three quarters of next year.

The majority of respondents to another question said the recession would be long and shallow.

These forecasts haven’t changed much from last month, but when asked about risks to the GDP outlook, 12 of 18 said it was to the downside. During this year, the economy was expected to expand by 4.4% but then contract by 0.9% next year before returning to 0.9% growth in 2024.

“2023 will be a difficult year for the economy as the effects of previous spikes in inflation and previous interest rate increases can be felt,” said Paul Dales of Capital Economics.

“The good news is that we believe the recession will end in the second half of 2023, and a gradual decline in inflation will likely allow the Bank of England to inject more strength into the recovery by cutting interest rates in 2024.”

Inflation was seen peaking at 10.9% this quarter, up from the 10.7% estimate last month, before drifting lower. However, it will not reach the bank’s target of 2.0% until the third quarter of 2024.

(For other stories from the Reuters World Economic Survey:)