While increasing interest rates by the most in 33 years, the Bank of England issued a warning that the UK is experiencing its longest recession since records have been kept. It foresaw a “very challenging” two-year downturn for the UK and an almost twofold increase in unemployment by 2025.
Bank CEO Andrew Bailey stated that UK households face a “tough road ahead,” but added that if forceful action is not taken now, things “will be worse later on.” It caused the largest increase in interest rates since 1989, from 2.25% to 3%.
The Bank is attempting to lower skyrocketing prices as the cost of living increases at the fastest rate in 40 years by raising rates.
The Ukraine war has increased the cost of food and energy, which has put many households in a difficult situation and begun to hurt the economy. When a nation’s economy contracts for two consecutive quarters of three months, it is said to be in a recession.
Companies typically make less money, wages decline, and unemployment increases. As a result, the amount of taxes collected by the government to fund public services like healthcare and education is reduced.
Previously, the Bank predicted that the UK would enter a recession at the end of this year and that it would last through the entire following year.
But it now thinks the economy has already entered a “challenging” downturn, which will last through the first half of 2024, a year that could see a general election.
The UK will not experience the deepest recession in its history, but it will be the longest since records have been kept, according to the Bank.
Although the unemployment rate is currently at a 50-year low, it is predicted to increase to almost 6.5%.
Since Liz Truss and Kwasi Kwarteng, the former prime minister and chancellor, unveiled their divisive mini-Budget in September, the interest rate has not been announced before.
Their proposals for £45 billion in unfunded tax cuts—many of which have since been reversed—sent the value of the pound plummeting and sparked market turbulence, necessitating the intervention of the Bank of England to calm things down.
Bailey asserted that he thought the UK’s standing abroad had been “damaged” by the mini-budget.
At a recent IMF meeting in Washington, he claimed, “it was very obvious to me that the UK’s position and the UK’s standing had been damaged.”
Kwarteng was fired as Chancellor the same week.
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible,” said Chancellor Jeremy Hunt.
Families, however, could not handle such steep rate increases, according to shadow chancellor Rachel Reeves, “when we’ve got rising food prices, rising energy bills, and now higher mortgage rates as well.”
With the most recent rate increase—the Bank’s eighth since December—borrowing costs are at their highest levels since 2008, when the UK banking system was on the verge of failure.
The Bank thinks that by raising interest rates, it will become more expensive to borrow money and deter people from making purchases, relieving pressure on prices.
Although savers will welcome its most recent rate increase, those who have mortgages, credit card debt, and bank loans will also be impacted.
Mortgage holders are also feeling uneasy. The Bank predicts that those whose fixed rate agreements are coming to an end may see their annual payments increase by up to £3,000 if interest rates continue to rise.
It declared that if inflation remained high, interest rates would rise. The Bank does not anticipate interest rates to rise to this level, contrary to what the financial markets had predicted for them to do.
Prior to the government’s announcement of its tax and spending plans under new Prime Minister Rishi Sunak at the Autumn Statement on November 17, the Bank will decide on interest rates.
In response to the Bank’s warnings, the pound fell 2% against the dollar on Thursday, and the cost of government borrowing increased.
(Adapted from TheGuardian.com)