Image Source: Bloomberg
As interest rates increased by the greatest in 27 years, the Bank of England warned that the UK would enter a recession. The economy is expected to go through a contraction in the final quarter of 2022 and continue to contract through the end of next year.
Interest rates increased to 1.75 percent as the Bank tried to rein in inflation, which is currently predicted to reach over 13 percent.
Although Governor Andrew Bailey acknowledged that the cost of living pressure was challenging, he warned that things would get “far worse” if interest rates weren’t raised.
Rising energy costs, a result of Russia’s invasion of Ukraine, are the primary cause of high inflation and slow growth.
By October, the Bank predicted, the average home will be spending about £300 per month on energy.
The anticipated recession would be the deepest downturn since 2008 when the UK banking sector was in danger of collapsing and lending was halted. Although the downturn is not expected to be as severe as it was 14 years ago, it could endure just as long.
The Bank of England’s governor, Andrew Bailey, stated that he has “great sympathy and huge understanding for those who are struggling hardest” with the expense of living.
Raising interest rates, which raise the cost of borrowing and should encourage individuals to borrow less and spend less, is one strategy to attempt and control inflation. It may also push people to increase their savings. However, many households, including some mortgage holders, would experience even more financial strain due to the interest rate increase.
With rates now at 1.75 percent, homeowners with a typical tracker mortgage will pay around £52 extra each month. There will be a £59 increase for those with conventional variable-rate mortgages. As a result, holders of tracker mortgages could pay up to £132 more in monthly interest compared to before December 2021, while holders of variable mortgages could spend as much as £167 more. Since the end of last year, interest rates have climbed six times in a row.
Increased interest rates also translate into higher fees for things like credit cards, bank loans, and auto loans.
Patrick Reid, a business owner in London, owes $25,000 in credit card and loan debt and worries about the expense of an increase in interest rates.
The most significant caution yet from the Bank of England
It is the Bank of England’s most piercing warning siren. The Bank of England announced the greatest rate increase in more than 25 years to tame even higher inflation peaks of an astonishing 13 percent. However, the biggest shock here is its forecast of a recession lasting as long as the Great Financial Crisis and as severe as that seen in the early 1990s.
While the inflation rate is anticipated to reach a 42-year high, this is a true full-fat recession. It is a prime illustration of the phenomenon known as stagflation, which occurs when an economy is in decline while inflation is rising. It will undoubtedly prompt inquiries as to why rates are being raised during a downturn when customers are already cutting back on their expenditures.
Energy costs have increased significantly this year, putting pressure on household budgets and slowing the UK economy’s expansion.
As it fights a war in Ukraine, Russia has cut back its oil supplies to Europe, and there are rising concerns that it may shut off the taps entirely.
Due to the potential for gas supply issues, wholesale prices have skyrocketed. As a result, energy companies are now passing these costs along to consumers, resulting in record-high household energy expenses.
Households have been impacted by rising food and fuel prices and energy costs.
The Bank stated that the UK’s economic growth was already weakening and that “the new spike in gas prices has contributed to another significant deterioration in the outlook for the UK and the rest of Europe.”
The Bank predicted that the inflation rate would remain at “extremely elevated levels” for most of the following year. After that, however, it will gradually return to the Bank’s 2 percent target next year.