Image Source: Bloomberg
According to the Bank of England, the UK may already be in a recession, which increased interest rates from 1.75% to 2.25%, the highest level in 14 years.
The Bank has increased rates seven times in a row in an effort to rein in rising prices.
As a result of the decision, borrowing costs have been at their highest level since 2008, when the UK banking system was in danger of failing.
Since December, interest rates have increased due to the accelerated rise in living expenses.
Many people are experiencing hardship due to inflation, which measures how quickly prices rise. Currently, it is 9.9%, which is the highest rate in almost 40 years.
Despite government efforts to rein in skyrocketing gas and electricity costs for homes and businesses, living costs are also widely expected to rise in October.
Theoretically, higher borrowing costs should encourage people to spend less and bring down prices due to rising interest rates.
Smaller than some economists had anticipated, the Bank increased by 0.5 percentage points to 2.25%.
According to various predictions, rates would rise by 0.75 percentage points to follow similar actions taken by the US Federal Reserve and the European Central Bank.
Raising rates too quickly, though, raises concerns that it might slow down the economy’s expansion.
In making its rate decision, the Monetary Policy Committee (MPC) of the Bank predicted that the UK economy was already in a recession. When the economy contracts for two straight quarters, that is what is meant.
The third quarter, or July to September, is also known as the MPC’s forecast, and it predicts a 0.1% decline in the UK economy. However, following a 0.1% decline in the second quarter, it has increased.
According to the Bank’s revised inflation outlook, the government’s intervention to subsidize domestic bills through the Energy Price Guarantee is “likely to limit significantly further increases,” the bank stated.
After initially predicting that inflation would reach 13% the following month, it now anticipates that it will peak at just under 11% in October.
Inflation is currently approaching the Bank of England’s 2% target, but even if it peaks in October, it is predicted to stay above 10% “over the following few months” before beginning to decline.
Interest rates are currently at a 14-year high, but by historical standards, they are still quite low.
Efforts by the Bank of England through the years
The Bank of England intervened with rate cuts after the UK voted to leave the European Union in 2016 and during the Covid pandemic, and as a result, borrowing costs have stayed at, or nearly at, record lows since the financial crisis.
Although the Bank of England has continued raising interest rates, the real issue at hand is how high rates will rise. According to financial market predictions, the rate will be higher than in the US and the Eurozone and will likely be close to 5%. Again, this illustrates higher inflation in this area.
As the US Fed had done last night, the Bank today refrained from raising the benchmark rate by 0.75 percentage points. The UK’s decision to adopt a similarly tough stance against inflation to that of the US was being watched by currency markets. Even so, the vote was close.
The government’s energy interventions allowed the Bank to breathe a sigh of relief that the inflation rate would now peak at 11% next month. However, rates are nevertheless continuing to rising because, despite the fact that the energy shock has subsided, the Bank of England still expects higher inflation to come from within the British economy.
All eyes are now focused on November, when the Bank will compute a new forecast to evaluate all government interventions, which reduce inflation but increase borrowing, to assess the overall situation.
The housing market is already suffering from the rise in mortgage rates. In the Bank’s opinion, a recession has already begun. There will be further rate increases. That is the question—exactly how many?