The Bank of England has today raised interest rates to 3% from 2.25%, its biggest rate rise since 1989 as it warned of a"very challenging" outlook for the economy.
Today's decision - the biggest in 33 years apart from a failed attempt to support the pound on Black Wednesday in 1992 - was in line with economists' expectations in a Reuters poll, but was not unanimous. "Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets," the bank said in unusually specific guidance to investors."The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary," the MPC added.
Markets are now more stable, with British government borrowing costs broadly back to where they were before the turmoil. On Tuesday, the Bank of England was able to begin selling bonds from its £838 billion quantitative easing stockpile. The Bank of England estimates that Britain's economy entered recession in the third quarter of 2022 and that the recession will last until the middle of 2024, causing the economy to shrink by 2.9%. Unemployment would rise steadily to 6.4% by late 2025, up from 3.5% now, its lowest since the mid-1970s.
The Bank of England's policymaking is made especially tricky by a lack of clarity over future government policy.
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