LONDON, May 6 (Reuters): The Bank of England sent a stark warning that Britain risks a double-whammy of a recession and inflation above 10 per cent as it raised interest rates on Thursday to their highest since 2009, hiking by quarter of a percentage point to 1 per cent.
The pound fell by more than a cent against the US dollar to hit its lowest level since mid-2020, below $1.24, as the gloominess of the BoE's new forecasts for the world's fifth-largest economy caught investors by surprise.
They also trimmed bets on the central bank hiking rates aggressively this year. Short-dated British government bond yields slid sharply.
The BoE's nine rate-setters voted 6-3 for the rise in Bank Rate from 0.75 per cent, with Catherine Mann, Jonathan Haskel and Michael Saunders calling for a bigger increase to 1.25 per cent.
Economists polled by Reuters had forecast an 8-1 vote to raise benchmark borrowing costs to 1 per cent, with one policymaker opposing a hike.
Central banks are scrambling to cope with a surge in inflation that they described as transitory when it began with the post-pandemic reopening of the global economy, before Russia's invasion of Ukraine sent energy prices spiralling.
The BoE said it was also worried about the impact of renewed Covid-19 lockdowns in China which threaten to hit supply chains again and add to inflation pressures.
But policymakers around the world are also trying to avoid sending their economies into a slump.
On Wednesday, the US Federal Reserve raised rates by a half-point to a range of 0.75-1.0 per cent, its biggest increase since 2000. Chair Jay Powell said more such hikes were on the table.
But Powell said the US economy was performing well, a contrast with Bailey's more downbeat assessment.
The BoE's rate rise was its fourth since December, the fastest pace of policy tightening in 25 years.
BoE flags risk of recession
FE Team | Published: May 06, 2022 21:54:52
BoE flags risk of recession
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