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Thursday, August 11, 2022

Bank of England raises interest rates to 1.75%, sees UK’s economy slip into recession

The United Kingdom (UK) will collapse into a year-long recession by the end of 2022 – its longest since the 2008 financial crisis and as deep as the one in the 1990s – with inflation peaking at more than 13 per cent stoked by the soaring price of gas and fuel this winter, the Bank of England (BoE) revealed in a doomsday warning.

Britain’s big squeeze also got even worse after the Bank raised interest rates by 0.5 per cent to 1.75 per cent – the highest single rise since 1997 – adding £1,000 a year or more to the average non-fixed mortgage in a new ‘world of pain’ for homeowners.

Food, fuel, gas and numerous other items are rocketing in price following the pandemic and the war in Ukraine – hitting record levels – but some economists have claimed that the BofE has been too slow to act as Britain careers towards recession.

Energy prices will push the economy into a five-quarter recession – with the Gross Domestic Product (GDP) shrinking each quarter in 2023 and falling as much as 2.1 per cent. “Growth thereafter is very weak by historical standards,” the Bank said on Thursday, predicting there would be zero or little growth until after 2025.

Bank Governor Andrew Bailey on Thursday blamed ‘the actions of Russia’ overwhelmingly for the economic crisis and the ‘energy shock’, which will push more households into poverty and also see more people lose their jobs.

He said: “Wholesale gas futures prices for the end of this year… have nearly doubled since May.” They are ‘almost seven times higher’ than forecasts had suggested a year ago, adding: “That’s overwhelmingly a consequence of Russia’s restriction of gas supplies to Europe and the risk of further cuts.”

Consumer Prices Index inflation will hit 13.3 per cent in October, the highest for more than 42 years, if regulator Ofgem hikes the price cap on energy bills to around £3,450, the Bank’s forecasters said this afternoon, predicting that it may not subside from levels last seen in the 1970 and 1980s for several years.

The Bank of England governor said: “Domestic inflationary pressures have also remained strong. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rise in their costs.

“The labour market remains tight with the unemployment rate of 3.8 per cent in the three months to May and vacancies at historically high levels.

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“The tightness of the labour market partly reflects the fall in the labour force since the start of the pandemic, which is in part due to the large rise in economic inactivity.”

The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s. They will drop by 1.5 per cent this year and 2.25 per cent, wiping out any wage rises.

As Britain faces its first recession for 15 years, the gloomy forecast by the Bank of England, revealed:

  • The UK’s GDP will drop by as much as 2.1 per cent in recession starting this year and lasting five quarters – the same length as the 2008 financial crisis, where GDP dropped 6 per cent. The depth of the upcoming recession will be similar to the one in the 1990s;
  • Interest rates have been put up from 1.25 per cent to 1.75 per cent – the highest single rise since 1997. Non-fixed mortgages will rise by £100 or more overnight. Millions more will come out of their fixed deals in the next two years;
  • Bank of England predicts inflation will still now be above 9 per cent in a year’s time – peaking at 13 per cent by the end of 2022 or early 2023; 
  • Unemployment predicted to rise from 3.7 per cent to 6.3 per cent in the next three years; 

Officials on the monetary policy committee (MPC) raised the base interest rate from 1.25 per cent to 1.75 per cent as experts warned inflation could be heading for 15 per cent. The Bank predicts it will be 13 per cent.

The Bank of England insists today’s rise is necessary to try to bring down inflation by next year –  but it comes as Britons face the worse squeeze on household budgets for a generation.

It said the UK will enter five consecutive quarters of recession with gross domestic product falling as much as 2.1 per cent – compared to 6 per cent in 2008.

Today’s rise is the largest since the Bank gained independence from the Treasury in 27 years, and the first 0.5 percentage point hike since 1995. The MPC of nine members voted eight to one in favour of a rise to 1.75 per cent.

The rate increase will immediately hit 20 per cent of homeowners with mortgages – around two million people. It will add around £90-a-month to the average mortgage of around £150,000. 80 per cent of homeowners are on fixed deals, so will be protected in the short term, but a third of these people will lose these deals within two years, meaning higher payments are on the horizon for millions more.

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