Bank of England raises rates by most since 1995 even as long recession looms

The Bank of England warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s

The Bank of England (BoE) raised interest rates by the most in 27 years on August 4, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.

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%—its highest level since late 2008—from 1.25%.

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

MPC member Silvana Tenreyro cast a lone vote for a smaller 25-basis-point increase.

The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, 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% in October—the highest since 1980—due mostly to the surge in energy prices following Russia's invasion of Ukraine.