The Bank of England warned the UK may already be in a recession as interest rates increased from 1.75 per cent to 2.25 per cent, the highest level in 14 years. Previously, the central bank anticipated that the economy would expand between July and September, but it now anticipates a 0.1 per cent decline.
In an effort to contain rising prices, the Bank has raised rates seven times in a row. With the global banking system on the verge of collapse in 2008, it raises borrowing costs to their highest level ever.
A lot of people are struggling as a result of inflation, which is the rate at which prices rise, which is currently at its highest level in almost 40 years.
Despite a government plan to rein in skyrocketing gas and electricity prices for homes and businesses, prices are expected to rise in October as well. The cost of borrowing increases as interest rates rise, which should, in theory, encourage people to cut back on their spending and lower prices.
But many mortgage-holding households will see an increase in costs. Those with typical tracker mortgages will pay an additional £49 monthly, while those with typical variable rate mortgages will see an increase of £31.
Those with fixed-rate contracts won’t be immediately impacted, but when their contracts are up for renewal, their costs might increase.
The UK economy will likely contract between July and September, according to the Bank. This will cause the UK to enter recession, which is defined as when an economy contracts for two consecutive quarters, following the economy’s slight contraction between April and June.
It claimed that the economy had been harmed by both a less-than-expected recovery from the Queen’s Platinum Jubilee bank holiday in June and the additional bank holiday for the Queen’s state funeral in September.
However, the Bank stated that it now anticipated inflation to not increase as much as it had initially anticipated because of the government’s assistance with energy bills for individuals and businesses.
It previously predicted that inflation would reach 13 per cent next month, but now anticipates a peak of just under 11 per cent in October.
Even if inflation peaks in October, it is predicted to remain above 10 per cent “over the following few months” before beginning to decline. Nevertheless, inflation is currently close to five times the Bank of England’s target rate of two percent.
The new chancellor Kwasi Kwarteng is getting ready to present a “mini-budget” on Friday, when he is anticipated to lower taxes and reveal other initiatives to boost economic activity, while the Bank works to control inflation. The plans’ potential to fuel inflation has caused some worry.
On Thursday the Bank said: “Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the [rate-setting] committee will respond forcefully, as necessary.”
“That new ‘stronger demand’ bit seems like a not-so-subtle reference to the loosening in fiscal policy that’s expected to be announced tomorrow. In short, the Bank has indicated it will raise rates further to offset some of the boost to demand from the government’s fiscal plans,” said Paul Dales, chief UK economist at Capital Economics.
Three of the MPC’s nine members voted in favor of the rate increase, which some economists had predicted the Bank would implement this month in line with similar actions taken by the US Federal Reserve and the European Central Bank.
(Adapted from BBC.com)