The Bank of England raised interest rates by the most since 1989 on Thursday but warned investors that the risk of Britain’s longest recession in at least a century means borrowing costs are likely to rise less than they expect.
The BoE increased Bank Rate to 3% from 2.25% and warned that the British economy might not grow for another two years – the longest slump in records dating back to the 1920s – if rates were to go up by as much as markets have recently bet. The pound tumbled after the decision, while London-listed stocks fell and UK bonds came under pressure.
“We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets,” Governor Andrew Bailey said, in an unusually blunt message.
The BoE said it now expects inflation will hit a 40-year high of around 11% during the current quarter, more than five times its 2% target. But it also thinks the economy has entered a recession that could mean it contracts in both 2023 and 2024 and shrinks by 2.9% in total.
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