Warning of 'carnage' as BoE to push UK into recession with 'extraordinary' 1.25% rate hike |  Personal finance |  Finance

Warning of ‘carnage’ as BoE to push UK into recession with ‘extraordinary’ 1.25% rate hike | Personal finance | Finance

Base rates could hit 3.50% within weeks and 6% in the spring, crushing millions of homeowners, consumers and businesses. The BoE’s tough line will push the UK even deeper into recession.

The Bank of England risks sinking the UK economy as it struggles to rein in inflation, whatever the cost.

His position has been hardened by the fallout from Chancellor Kwasi Kwarteng’s shock mini-budget, which sparked a rush in the gilt market, said Tom Selby, head of pension policy at AJ Bell.

“Investors seemingly spooked by the government’s planned spending spree sold bonds en masse, driving down the price and pushing gilt yields higher.”

BoE Governor Andrew Bailey responded by pledging to spend up to £65bn to buy bonds to halt the rout and prevent a £1.5trillion pension fund meltdown.

Bailey now faces “tremendous uncertainty” as he waits to see if it will restore calm to the market, Selby added.

To date, the Bank has only made around £5bn of gilt purchases, but it has given itself scope to do much more.

Selby said: “He has raised the daily buy limit on his bond intervention from £5bn to £10bn as he tries to calm fears of a pension fund sell-off.”

In the years following the 2008 financial crisis, the BoE bought £875 billion worth of gilts through its quantitative easing (QE) program to save the economy from collapse.

Prior to the Kwarteng mini-budget, Bailey had planned to tighten monetary policy by reducing gilt holdings.

Now he’s been forced to buy even more instead, said Jim Wood-Smith, market commentator at Hawksmoor Investment Management.

“His quantitative tightening plan was holed below the waterline by the near carnage in the gilt market and the Bank’s subsequent need to stabilize pension funds.”

This leaves the Bank’s Monetary Policy Committee (MPC) bereft of tools to tackle inflation, which is currently at 9.9% and is expected to hit 11% in October.

“The MPC is left with the lone weapon of interest rates and will feel it needs to be even more aggressive in raising them,” Wood-Smith said.

READ MORE: UK is in financial crisis but EU shouldn’t rejoice – it’s next

He made this prediction BEFORE the bond market collapsed, which will force him to raise rates even higher than initially expected.

The BoE is not the central bank raising rates, the US Federal Reserve is leading the charge.

The US federal funds rate is now 3.25% and expected to climb further, says Matt Weller, global head of research at Forex.com.

Traders expect a 0.75% rise at the Fed’s next meeting on November 1-2, followed by a 1.25% rise in December.

If correct, that would take the funds rate to 5.25%, and Weller said more would follow in 2023 as the Fed “continues on its path to crush inflation at all costs.”

The difference is that the US economy is still buoyant and can take its medicine.

The UK can’t but will have to swallow it anyway.

Spread the love

Leave a Comment

Your email address will not be published. Required fields are marked *