Markets in meltdown as recession fears mount: Bank of England hikes interest rate and warns inflation will top 10% this year
Global markets were plunged into chaos last night after central banks ramped up their fight against inflation.
On a bleak day for the economy, the Bank of England raised interest rates to a 13-year high while warning inflation will top 10 per cent, plunging Britain into recession.
The grim analysis came just a day after the Federal Reserve raised rates in the US by the most in 22 years in an attempt to get a grip on rising prices.
Wall Street: In New York, stock markets tumbled with more than 1,000 points was wiped off the Dow Jones Industrial Average as it fell 3.1%
The pound plunged more than 2 per cent to a low of $1.2326 – a level not seen for nearly two years – as officials on Threadneedle Street sketched out a gloomy forecast of soaring inflation and stalling growth.
And in New York, stock markets tumbled, with more than 1,000 points was wiped off the Dow Jones Industrial Average as it fell 3.1 per cent.
The tech-heavy Nasdaq index sank by 5 per cent, while the S&P 500 index of America’s top companies slid by 3.6 per cent.
It was one of the worst days for US stocks since the Covid crash of 2020. Investors feared a string of rate hikes were on the way, despite attempts by the Fed on Wednesday to downplay its aggressiveness.
Central banks around the world are attempting to push inflation down by raising rates, encouraging saving rather than spending.
But if they hike rates too fast, they risk depressing the Covid recovery and even tipping economies back into recession.
This is a worry for high-growth companies such as Amazon, Facebook-owner Meta and Netflix, as much of their valuation is based on the belief that they will rake in money over the future.
This could be under threat if the economy slumps and spending falls – or if interest rates are higher, making borrowing more expensive. David Madden, an analyst at Equiti Capital, said investors were in for a ‘choppy’ period.
He added: ‘It seems that fears about lower growth in the US are still in circulation despite the Fed not acting excessively hawkish.’
Bank economists vote for bigger rate hike
Despite the looming threat of a recession, three members of the Bank of England’s monetary policy committee voted for an even bigger interest rate hike.
Jonathan Haskel, Catherine Mann and Michael Saunders all argued rates should rise from 0.75 per cent to 1.25 per cent. They were outvoted by their six colleagues on the MPC – including governor Andrew Bailey – who settled on a hike to 1pc.
Bailey said the Bank was toeing a ‘narrow line’ between trying to curb rampant inflation and supporting the economy.
While rate hikes should help to keep a lid on prices, they also run the risk of throwing the Covid recovery into reverse as businesses and households face higher borrowing costs.
The Bank itself is forecasting a slump in economic activity from the end of this year, as rising prices dampen spending.
Investors were relatively sanguine about the Fed’s 0.5 percentage point rate hike on Wednesday evening – but this was flipped yesterday as traders digested the dreary economic outlook.
Randy Frederick, of the Schwab Center for Financial Research in the US, said the extreme reversal in sentiment was ‘truly extraordinary’.
Meta dropped by 7 per cent, Amazon by 7.6 per cent, Microsoft by 4.4 per cent and Google parent Alphabet by 4.7 per cent.
In the UK, sterling tanked as investors sold the currency, worried that its value would be eroded by rising inflation and an economic slump.
Gloomy forecasts from the Bank of England predicted inflation would soar to 10.25 per cent in the fourth quarter – its highest level since 1982.
In response, officials at the central bank hiked interest rates from 0.75 per cent to 1 per cent, a level not seen since 2009.
Bond yields, or how much investors expect to be paid to lend, rallied in response. The yield on 10-year gilts, issued by the Government, was close to 2 per cent, a near six-year high.
The yield on the equivalent US Treasury stayed firmly above 3 per cent, a level not seen since 2018.
The Bank warned inflation in Britain would once again be pushed higher by rising energy costs when regulator Ofgem lifts the price cap on household bills again this autumn.
Oil and gas has become increasingly expensive since Vladimir Putin’s invasion of Ukraine, as Western countries tried to shun Russian supplies.
This means households and businesses will have less to spend elsewhere, causing economic output to shrink by 1 per cent in the fourth quarter of this year.
It will contract by 0.25 per cent across the whole of 2023, the Bank said.
But despite the worries about falling output, Threadneedle Street said it was pushing ahead with plans to end its £895billion money-printing programme.
The scheme involved the Bank using its own cash to buy gilts and bonds – loans handed by investors to the Government and companies.
Bank governor Andrew Bailey has now instructed employees at the Bank to ‘work on a strategy for UK government bond sales’.
He chose not to kick off the sales yesterday, instead saying they would start in September at the earliest.