Bank of England Raises Rates to 4 Percent, Its 10th Straight Increase

The European Central Bank, too, is expected to raise rates on Thursday as it continues to battle inflation. This week, data showed that the annual rate of inflation for the 20 countries that use the euro fell to 8.5 percent in January, from 9.2 percent the previous month but core inflation, which excludes volatile energy and food prices, held firm.

And on Wednesday, the U.S. Federal Reserve raised rates a quarter point, to a range of 4.5 to 4.75 percent. It was the Fed’s eighth increase in a year but the smallest since March, as officials said that inflation had finally started to meaningfully ease.

On Thursday, the Bank of England also updated its forecasts for the economy, presenting a much less dismal outlook than it had three months ago.

In 2023, the bank expects the economy to shrink by half a percentage point, instead of the 1.5 percent contraction it forecast in November. While the contraction is expected to last five quarters from the current quarter, it’s a much milder recession than previously expected because of lower wholesale natural gas prices, the expectation that the central bank won’t have to raise interest rates as high as previously anticipated, and unemployment rising less than previously forecast giving consumers more confidence to spend. The bank’s forecasts were based on financial market expectations that its interest rate would peak at 4.5 percent in the middle of the year.

But the outlook still can’t be described as good. The British economy isn’t expected to reach it’s prepandemic size before 2025, which is as far as the bank’s forecasts go.

Earlier this week, the International Monetary Fund downgraded its forecast for the British economy, predicting a 0.6 percent contraction in 2023, instead of the 0.3 percent expansion it forecast last October. While the size of the decline isn’t far from the Bank of England’s new forecast, the fund’s prediction stands out because it presented Britain as an outlier. The I.M.F. upgraded its outlook for global growth.

Among the challenges facing the British economy is the size of its work force, which hasn’t returned to its prepandemic level. Since February 2020 half a million more people have counted as economically inactive, as workers over 50 retire early and more people report having long-term sickness. A tighter labor market is restraining potential growth and putting upward pressure on private-sector wages.