The Russian war in Ukraine is starting to affect the UK. According to Governor of the Bank of England (BoE) Andrew Bailey, the conflict is “historic shock to real incomes”. During the conference of the Brueghel Institute on Monday, March 28, the latter pointed out that the rise in energy prices had reached levels never seen in the 1970s, which, however, were marked by an oil tanker strike that caused inflation for several years . years.
“We expect growth and demand to slow, and we are starting to see this in our business and consumer research,” it said in a statement. governor of the Bank of England.
The poorest households, those who could not save during the pandemic and spend more of their income on heating and transport, will be the first to suffer, said Andrew Bailey.
This dismal forecast comes after a very dynamic 2021 for the United Kingdom, which recorded a record 7.5% GDP growth last year after contracting 9.4% in 2020. Even before the start of the war in Ukraine, the Bank of England and economists expected growth of about 3.75%. Some have even warned that inflation and higher taxes will hold back growth.
Tightening monetary policy to fight inflation
For all central banks, the war in Ukraine presents a new dilemma: the disruption of the market for energy and other commodities (wheat, aluminum, etc.) drives up prices, exacerbating already high pre-conflict inflation. In the United Kingdom, inflation reached 5.5% in January and even 6.2% in February, well above the 2% that the Bank of England had originally expected. According to the forecasts of the monetary institute, it should also increase.
To try to counter this rampant inflation, central banks must choose between maintaining ultra-loose monetary policy at the risk of seeing inflation for a long time, or raising their rates, which affects creditworthiness and personal and corporate credit.
The Bank of England has decided to raise its rates three times from the end of 2021. The last time it happened was on March 17 with a 0.25 percentage point increase in the interest rate to 0.75%. She justified her decision by saying “labor market tightness, lingering signs of inflationary costs and pressures, and the risk of them continuing.”
The Bank of England also warned that “probably” that the war in Ukraine “exacerbates supply chain disruptions.” “Therefore, inflationary pressures will increase significantly in the coming months, while growth in net energy-importing countries such as the UK is expected to slow down.” Bank of England warns.
The Bank of England acknowledged that if “Slight additional monetary tightening is likely to be needed in the coming months”, “risks exist on both sides of this judgment”. The head of the Bank of England suggested that this Monday, March 28, would reflect the uncertainty looming over the market, and assured that he had not decided on a possible fourth rate hike in May. “All I know for sure is that the meeting will take place in May,” he joked.
Peak expected in October
“Inflation will continue to rise in the coming months, to about 8% in the second quarter of 2022 and possibly even higher at the end of the year,” Bank of England warns. He predicted that inflation would peak in April at 7.25% due to rising gas and oil prices, which would push the UK energy market regulator to increase the regulated price of electricity. But the conflict in Ukraine has skyrocketed hydrocarbon prices, and the UK electricity price cap could increase even further when it is reviewed in October.
Bank of England no longer rules out inflation later this year “several percentage points higher than expected.” Yes “In the long term, a marked slowdown in inflation is expected,” notes the Bank of England, this is under a gloomy scenario: the cost of electricity by purchasing power should destroy some of the demand.
ZOOM: LONDON READY TO REMOVE SANCTIONS ON RUSSIA UNDER CERTAIN CONDITIONS
While the UK has imposed sanctions on more than 1,000 Russian and Belarusian individuals and companies in recent weeks, they could be lifted if the Kremlin commits itself to a full ceasefire, withdraws its troops from Ukraine, and commits not to commit further aggression against Ukraine. reports the British Foreign Office. This was stated by Secretary of State Liz Truss in an interview with the Sunday Telegraph on Saturday (March 26).
These statements echo statements by US Secretary of State Anthony Blinken that sanctions against Russia “not intended for permanent use” and that they may disappear if Moscow changes its attitude.
The British minister also said that she had created a negotiation unit in her ministry to help Ukraine in its negotiations with Russia. However, she warned that she could only be useful after “Russians will be serious” in their willingness to negotiate. “I don’t think they’re serious right now and that’s why I said you have to be tough to make peace” she added. Therefore, it is necessary “double fines” as well as “double the amount of weapons we send to Ukraine”, she assured.