The Bank of England announced that Britain’s economy has entered a recession as a result of raising interest rates to combat the worst inflation in 40 years.

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The key base rate was raised by 0.5 percentage points to 2.25%, the highest level since 2008, with the support of the majority of the Bank’s nine-member monetary policy committee (MPC), which decided that the risks of inflationary pressures becoming entrenched outweighed the immediate threats to the economy.

According to Threadneedle Street, the economy was on track to see a second straight quarter of declining output as households were forced to cut back on their spending due to rising energy costs and the cost of a weekly shopping

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A further 0.1% reduction in GDP is now anticipated in the third quarter due to a decline in consumer expenditure and lower activity in manufacturing and construction, the Bank said. This follows a 0.1% decline in GDP in the three months to June as the economy sputtered into reverse.

The additional bank holiday for the Queen’s platinum jubilee, as well as the effect of companies closing their doors as a gesture of respect for the state burial this week, were also factors in the decline, according to the report.

Three MPC members supported a 0.75 percentage point hike, five supported a half-point increase, and one advocated for a more modest quarter-point increase.

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The financial markets had gambled on an increase of 0.75 percentage points to match the Federal Reserve’s strong increase on Wednesday as the US bank aims to squeeze inflation out of the greatest economy in the world. The City had been ready for at least a half-point increase.

Due to growing worries about inflation becoming ingrained, three MPC members—Dave Ramsden, one of the Bank’s deputy governors, and the external members Jonathan Haskel and Catherine Mann—pushed for a more stringent 0.75 point hike.

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The Bank’s governor, Andrew Bailey, joined the majority of the MPC in voting for a half-point hike, while the rate-setting panel’s new external economist, Swati Dhingra, urged for a lesser quarter-point increase out of worry about the weakening state of the economy.

The decision was made a day before Kwasi Kwarteng, the chancellor, outlines the specifics of the government’s energy price guarantee and a package of comprehensive tax cuts that will cost more than £150 billion in order to spark economic growth and protect consumers from skyrocketing costs.

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The Bank predicted that the energy price guarantee would avoid an inflation peak that was greater than the anticipated 11% peak this autumn. Even while the consumer price index decreased somewhat from 10.1% in July to 9.9% in August, it is still about five times the bank’s target rate of 2% and is at a level not seen since the early 1980s.

The Bank however, cautioned that the impact of the government’s support measures could increase inflationary pressure.“While the guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak … this would add to inflationary pressures in the medium term.”

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The Bank indicated it will begin actively selling £80 billion of UK government bonds it had purchased as part of a quantitative easing programme, which has been utilised since the 2008 financial crisis to stimulate the economy, in an effort to combat inflationary pressures. Over the next two years, it wants to bring its portfolio of gilts down to £758 billion over the next two years.


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