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Bank Of England Continues Its Withdrawal Of The Cheap Money Pacifier Despite Recession Risk

By Anna Peel. Originally published at ValueWalk.

Bank of England Next UK Prime Minister

Withdrawing the pacifier of cheap money was never going to be easy, particularly with the economy at crawling place but the Bank of England has clearly judged that leaving rates low will do more harm than good even though it is set to tip the UK into a downturn.

The last time rates were at 1% was in February 2009 as the repercussions of the global financial crisis were taking hold, and Lily Allen was at number 1 in the UK music charts with her aptly named track The Fear.


Q1 2022 hedge fund letters, conferences and more

Bank Of England Is Taking A Softly-Softly Approach

Right now that mood music is back with policymakers at the Bank of England clearly sharing fears that unless action is taken now to lower demand in the economy, inflation will spiral out of control, which could cause even more pain for the economy.  Already it’s predicting inflation will shoot up to a frightening 10% with a rise in the energy price cap set to cause more financial pain in the Autumn.  With more interest rate rises expected alongside elevated commodity prices that are set to squeeze consumer and company spending power, this pincer movement is expected to lead to a contraction in economic output by 0.25% in 2023.

The stage is set for a pretty bleak winter of discontent with the economy heading into reverse and little end in sight to rising prices given the ongoing toll the war in Ukraine is having on commodity markets. The oil price has marched up even higher today, with Brent settling above $110 dollars a barrel after the EU moved to ban most Russian crude imports.

The Bank is still taking a softly-softly approach when it comes to rolling back its huge bond buying stimulus programme to avoid tantrums in the bond markets in the form of spiking yields which would make borrowing much more expensive. It’s kicked the roll back of its quantitative easing programme into the long grass, with only an update planned at the August meeting on whether to start sales. For now in the words of Harry Styles currently sitting at no.1 in the charts – it’s keeping its stimulus policy ‘As it was’.

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown


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