UK 'can overcome economic challenges'

·3-min read

Britain's finance minister Nadhim Zahawi remains confident the country is taking the right actions to overcome global economic challenges, after the Bank of England hiked rates and warned inflation would top 13 per cent.

"Along with many other countries, the UK is facing global economic challenges and I know that these forecasts will be concerning for many people," he said in a statement.

"I'm confident that the action we are taking means we can also overcome these global challenges."

The Bank of England (BoE) raised interest rates by the most in 27 years on Thursday, despite warning a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13 per cent.

"Addressing the cost of living is a top priority and we have been taking action to support people through these tough times," Zahawi said.

"We are also taking important steps to get inflation under control through strong, independent monetary policy, responsible tax and spending decisions, and reforms to boost our productivity and growth."

Reeling from a surge in energy prices caused by Russia's invasion of Ukraine, the BoE's Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75 per cent - its highest level since late 2008 - from 1.25 per cent.

The 50 basis point increase had been expected by most economists as central banks around the world scramble to contain the surge in prices.

Governor Andrew Bailey said all options were on the table for the BoE's next meeting in September, and beyond.

"Returning inflation to the two per cent target remains our absolute priority. There are no ifs and buts about that," Bailey said at a news conference.

The BoE warned Britain was facing a recession with a peak-to-trough fall in output of 2.1 per cent, similar to a slump in the 1990s but far less than the hit from COVID-19 and the downturn caused by the 2008/09 global financial crisis.

The economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis.

Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3 per cent in October - the highest since 1980 - due mostly to the surge in energy prices following Russia's invasion of Ukraine.

"Today's decision confirms the notion of a central bank determined to crush inflation in the face of ongoing supply-side challenges, including a very tight labour market and soaring energy bills," Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said.

British consumer price inflation hit a 40-year high of 9.4 per cent in June, already more than four times the BoE's two per cent target, triggering industrial action and putting pressure on whoever succeeds Boris Johnson as Britain's prime minister to come up with further support.

Britain's central bank has now raised rates six times since December but Thursday's move was the biggest since 1995.

The pressure on Bailey and his colleagues to move in larger steps intensified after recent big rate hikes by the US Federal Reserve, the European Central Bank and other central banks.

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