As recession looms, Bank of England independence is under threat | interest rates

The economic picture painted by the Bank of England for the coming years was unfailingly bleak. Long recession, high inflation, falling living standards: it would be hard to find a worse set of conditions for a government before a general election.

Threadneedle Street came under fire even before it announced its latest shocking predictions. It can expect no complacency now, because the government will need to find scapegoats to blame for the misery to come.

And there can be a lot of that. The fact that the Bank’s Monetary Policy Committee raised interest rates for the sixth consecutive meeting did not come as a shock. Even more surprising was the pessimistic nature of the forecasts that accompanied the MPC’s decision.

Inflation is now expected to peak at 13.3% in October – the highest level since September 1980 – and will remain close to 10% within a year. The economy will start to contract in the last three months of this year and won’t start growing again until early 2024. Living standards will fall by 5% over the next two years – a drop unmatched since modern records began in the early 1960s.

Against this background, the MPC raised interest rates by 0.5 percentage point to 1.75%. Not only was it the largest increase in the official cost of borrowing since 1995, it was also the first time the committee raised interest rates with the expectation of a recession.

‘Uncomfortable situation’: Bank of England says UK will enter recession – video

Eight of the nine members voted for a 0.5 point increase, on the grounds that the labor market remained tight and there was a risk that inflation could become an integral part. But the labor market is not expected to remain strong for long: The bank believes that the recession, expected to last as long as those in the early 1980s and late 2000s, will push unemployment from less than 4% to more than 6% by 2025. Long benefits queues and rising interest rates will lead to a significant cooling in the housing market.

The forecast is based on two assumptions: that financial markets are right in believing that interest rates will peak at 3% and that there will be no more government support for struggling families. Both are questionable. Some analysts believe the economy is so weak that the bank will stop tightening after raising the interest rate once or twice. There will definitely be more help with energy bills this fall, no matter who the prime minister is.

Politically speaking, the bank has rarely been in a tighter position. A year ago it believed inflation would peak at 4% but has steadily raised its forecasts since then. Andrew Bailey, the bank’s governor, dismissed criticism that the MPC had fallen asleep while driving and was now on the brakes at exactly the wrong time. It says high energy prices – which alone account for half of the 13% annual inflation rate – and global supply chain bottlenecks are responsible for most of the increase.

Bailey said the pain was inevitable but would be worse if the bank allowed inflation to take root. The MPC’s warning that it will be “particularly alert to indications of persistent inflationary pressures” means that another half-point increase is possible next month.

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Both contenders for conservative leadership said the bank’s forecasts supported their economic plans: in the case of Rishi Sunak, lowering inflation was the number one priority; In the case of Liz Truss, tax cuts were needed to stave off a recession.

Truss, the frontrunner to replace Boris Johnson as prime minister, has been openly critical of Threadneedle Street. At the very least, she would have ordered a review of the bank’s mandate – the legal obligation to hit the government’s 2% inflation target – but she was hinting to go further. For the first time since being given the freedom to set interest rates by Gordon Brown in 1997, the bank’s independence appears to be in jeopardy.

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