West News Wire: In an effort to contain soaring inflation brought on by the consequences of Russia’s war in Ukraine, the Bank of England increased interest rates by the highest amount in more than 27 years on Thursday, predicting that the UK economy will enter a recession by the end of the year.

The bank’s benchmark interest rate has increased by three-quarters of a point to 1.75 percent, the highest level since December 2008, when the global financial crisis was at its worst. As Russia restricts natural gas to Europe and future cuts are a possibility, the measure aims to lower skyrocketing consumer prices caused by rising energy expenses, according to Bank of England Governor Andrew Bailey.

“There is an economic cost to the war,’’ Bailey said at a news conference. “But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target.”

The bleak outlook in the world’s fifth-largest economy shows the ripple effect of the war, with people mired in a cost-of-living crisis that has surged the cost of everything from groceries to utility bills. And it lays bare the difficult position that central banks worldwide are facing: how to control surging inflation without tipping economies into recession that were just beginning to recover from the coronavirus pandemic.

In the U.K., inflation will accelerate to over 13% in the final three months of the year and remain “very elevated” for much of 2023, the bank said. The forecast reflects a sharp increase from the 40-year high of 9.4% recorded in June.

The bank’s forecasters say inflation will hit its highest point for more than 42 years amid the doubling of wholesale natural gas prices tied to the war. Those energy prices will push the economy into a five-quarter recession with gross domestic product shrinking each quarter in 2023.

“Growth thereafter is very weak by historical standards,” the bank said.

Central banks around the world are making borrowing costs higher for consumers, businesses and the government, which tends to reduce spending and ease rising prices. But such moves are also likely to slow economic growth.

The U.S. Federal Reserve has moved aggressively, increasing its key rate by three-quarters of a point in each of the past two months to a range of 2.25% to 2.5%. The U.S. economy shrank from April through June for a second straight quarter, raising fears that the nation may be approaching a recession.

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Recession is also a growing concern in Europe as shrinking flows of natural gas from Russia drive inflation and threaten to force factories to ration this winter. Targeting persistently high inflation, the European Central Bank’s first rate increase in 11 years was a larger-than-expected half-point hike last month.

“The Bank of England has become the latest in a string of international central banks to deliver historically large rate hikes,” said Luke Bartholomew, senior economist at abrdn. “The bank’s forecasts make clear just how difficult the UK’s economic picture is compared with other major countries.”

The International Monetary Fund last week cut its outlook for global economic growth, citing higher-than-expected inflation, continuing COVID-19 outbreaks in China and further effects from the war in Ukraine.

The landscape is especially complicated for central banks because many of the factors driving inflation are beyond their control, particularly food and energy prices that have soared due to uncertainty surrounding Russia’s invasion.

External pressures are becoming embedded in the U.K. economy, with public- and private-sector workers demanding wage increases to prevent inflation from eroding their living standards.

“With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023,” said Jack Leslie, senior economist at the Resolution Foundation, a think tank focused on the living standards of low- and middle-income families.

In December 1994, when such decisions were still taken by the government’s treasury chief in agreement with the governor of the central bank, the U.K. approved a comparable interest rate increase.

UBS Global Wealth Management economist Dean Turner stated that he did not envy the situation faced by the Bank of England.

What should a central banker do, he pondered. Should they prioritize the backdrop of sluggish growth or the current inflation, the majority of which is caused by variables outside the Bank of England’s control?

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