Friday, September 29

The Bank of England approves the biggest rate hike in 32 years and anticipates a recession

The Bank of England (BoE) announces another rise in official interest rates of 0.5%, the biggest bump since 1995, to 1.75%, the highest level since 2008. The central bank of the United Kingdom The United Kingdom warns that the inflation crisis is getting worse and reacts forcefully by making mortgages and loans more expensive to stop fueling price increases.

The ECB raises interest rates 0.5 points, double what was announced, in the face of the price crisis

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The BoE follows the path of the United States Federal Reserve (Fed) and continues to raise this rate, a benchmark for the price that banks put on credit, and leading the way for the European Central Bank (ECB), which made the first increase on July 21, also 0.5%, but starting from 0%.

The institution that directs the monetary policy of the United Kingdom regrets the sharp rise in “wholesale” energy prices, and specifically gas and electricity, and justifies the aggressive rise in official interest rates in that “as This feeds through to retail energy prices, exacerbating the decline in real household income and driving up inflation even more.”

His forecast is for the CPI (Consumer Price Index) to accelerate to 13% in the fourth quarter of 2022, “and to remain at very high levels for much of 2023,” he observes.

Recession from the fourth quarter in the United Kingdom

“GDP growth in the UK is slowing. The latest rise in the price of gas has caused another significant deterioration in the outlook for activity and the rest of Europe,” he continues, and does not hide the expectation that “the United Kingdom will enter a recession from the fourth quarter of this year.” A situation in which the United States already finds itself, and which threatens the European Union (EU).

The problem with central banks is that their response to the energy and inflation crisis involves a tightening of financing conditions, after years of cheap credit, which is another brake on economic activity.

The contradiction is that cooling down lending to stop fueling inflation is precisely what the Fed, BoE or ECB are seeking, even if the risk of causing a recession increases and the rate hike has no effect on gas. or oil, which depend on geopolitical issues.

This same Wednesday, the Organization of Petroleum Exporting Countries (OPEC) and other countries such as Russia decided to increase oil production by 100,000 barrels per day from September. The decision initially slightly boosted the price of a barrel of Brent oil as it was seen as “insufficient”, although futures later fell back below 100 dollars. But they remain at unusually high levels. On the other hand, uncertainties are multiplying about a total cut of Russian gas consumed by the EU, after shipments have already been drastically reduced in recent weeks.

Meanwhile, the Bank of Spain is already signaling a tightening of financing conditions in our country (see chart above), with data prior to the ECB’s official rate hike. “The average costs of new loans granted to households and companies have risen slightly in recent months, in line with the start of the normalization of monetary policy [del BCE]”, he notes.

Difficulties in obtaining loans increase according to SMEs

Perception of SMEs about the availability of bank loans and percentage of them that have requested them

Source: Bank of Spain

In the same vein, “the criteria for approving loans to families and non-financial companies have tightened moderately in the first half of the year”, and the forecasts “point to a contraction in the supply of credit to SMEs in the next months. For its part, the demand for credit is weak, especially from SMEs”. “On the other hand, requests for loans for home purchase would have continued to grow,” according to the agency, despite the fact that mortgages are also rising.