The GBP EUR exchange rate was -1.25% lower after the Bank of England (BoE) interest rate meeting. The BoE raised rates to 1% as many analysts had expected but had a scary outlook for energy bills and inflation. The chances of taming inflation without a recession are also extremely challenging, with a forecast for negative growth in the final quarter.
The GBP to EUR was trading at 1.1735 after dumping to almost 1.1700 on the news.
Bank of England warns of 10% inflation and high energy bills
Inflation could surge to 10% this year, the Bank of England has warned, while energy bills could be forced to a 40-year high.
The UK economy is set to go deep into reverse, with soaring energy bills set to put a further squeeze on households, the Bank of England has said today. The scary forecast came as the Bank hiked interest rates from 0.7% to a 13-year high of 1%. Some of its policymakers had also voted for an immediate increase to 1.25%.
The Bank is now predicting average annual gas and electricity prices, which had already touched £1,971 last month, to leap again in October, to around £2,800.
Together with a global surge in commodity prices from Russia ’s war in Ukraine, that will see Britain’s economy go into negative territory for the final three months of this year, the Bank forecast in its latest update.
The Monetary Policy Committee (MPC) believes the economy will then remain weak next year, and could shrink slightly, but forecasters have been continually wrong.
The MPC voted 6-3 to increase its base rate, with 3 voting for the increase to 1.25%. Thursday marked the first time the Bank has ever voted to increase rates four times in a row, going back to 1997. Analysts still see it going higher to an expected 2.5% by the middle of next year.
In its update, the MPC said: “Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth.”
UK should be a services economy, think tank says
The UK should move towards being a services-oriented economy in the future, rather than relying on its competitiveness in the finance sector, a think tank said.
According to a report by the Resolution Foundation, Britain’s economic advantage should not be based on financial services or manufacturing but expanded to include the arts, biomedical sciences, and intellectual property.
The Foundation noted that although the UK is well-known for exporting financial and business services, accounting for 9% and 7% of total exports respectively, those were in decline.
Financial services fell as a share of exports from 12% in 2009 to 9% a decade later, despite services growing.
“While the UK stands out for being a broad-based services exporter, it also has notable advantages in several growing goods categories, including pharmaceuticals, beverages, aircraft and works of art,” it said.