UK in downturn, expresses Bank of Britain as it raises loan costs to 2.25%

London, September 22, 2022 — The Bank of England delivered two messages at once on Thursday: Britain's economy is already in recession, and interest rates are going up anyway. In a rare three-way split, the nine-member Monetary Policy Committee voted to raise the base rate by half a point to 2.25%, its highest level in 14 years, judging that the risk of inflation becoming entrenched outweighed the short-term damage of tightening into a downturn.

What the Bank announced

The headline, as reported at the time, was the seventh consecutive rate rise since December 2021, and it took borrowing costs to levels not seen since the 2008 financial crisis. The Bank's reasoning was blunt: with energy bills soaring and the weekly shop getting more expensive, households were already pulling back on spending, and consumer prices — 10.1% in July, 9.9% in August — were running five times the Bank's 2% target. Something had to give, and Threadneedle Street chose to keep squeezing.

And the recession call: after GDP fell in the three months to June, the Bank said a further 0.1% decline was now expected in the third quarter — two consecutive quarters of contraction, the textbook definition of a recession, per Reuters. The Bank pointed to weaker consumer spending, softer manufacturing and construction activity, and businesses closing for the state funeral of Queen Elizabeth II — with Reuters noting that extra bank holiday itself dragged on the quarter's output.

The 5–3–1 split

This was not a confident committee. Five members, including Governor Andrew Bailey, backed the half-point move. Three — Deputy Governor Dave Ramsden and external members Jonathan Haskel and Catherine Mann — wanted a sharper 0.75-point rise to 2.5%, worried that inflation was becoming entrenched; Reuters noted markets had been betting on exactly that, to match the US Federal Reserve's 0.75-point hike the day before. One member, the committee's newest external economist Swati Dhingra, wanted just a quarter-point rise, alarmed by the deteriorating economy.

CMC Markets analyst Michael Hewson called the split "not a good look"; whatever you think of that verdict, a three-way split at the top of a tightening cycle told its own story. The Bank simply did not know how hard to push. In the same meeting, the committee voted unanimously to shrink its bond holdings — quantitative easing running in reverse — by £80bn over twelve months, to £758bn, per the September monetary policy summary.

What it meant, for actual people

Strip out the committee-speak and the consequences were immediate. Mortgage borrowers on variable and tracker deals saw payments rise within weeks; savers got a little more on deposits, nowhere near enough to offset 10% inflation. Businesses facing higher energy costs now faced higher borrowing costs too.

The timing made it messier. The decision landed one day before Chancellor Kwasi Kwarteng's mini-budget, which paired the government's energy price guarantee — a £150bn support package, per Reuters — with sweeping tax cuts: an attempt to kick-start growth by putting money back into people's pockets while the Bank was actively taking money out. The two arms of economic policy were pulling in opposite directions, and markets noticed: sterling slid below $1.13 for the first time in 37 years.

The road ahead, from that autumn

The Bank's own guidance was the familiar formula — "should the outlook suggest more persistent inflationary pressures, including from stronger demand, the Committee will respond forcefully, as necessary" — which told you everything about how uncertain the outlook was. The Governor's scheduled open letter to the chancellor, exchanged because inflation was running this far above target, was published alongside the decision itself.

Looking back from today, this September 2022 decision is one of those moments where the tension in British policymaking is visible in a single vote: raise rates into a recession and risk deepening it, or hold fire and risk inflation digging in. The Bank chose inflation. Whether it chose correctly was argued about for years afterward — and the 5–3–1 split meant the argument was already happening inside the building.