London: The Bank of England on Thursday raised the base rate of interest by 0.75 percentage points to 3 per cent, the single biggest increase in more than three decades, as it said the UK was already in recession which is likely to be the most prolonged since records began.
The central bank warned of protracted contraction in the coming years, with high inflation and unemployment rates. The length of its forecast recession of around eight successive quarters in which gross domestic product (GDP) shrinks, would make it the longest since UK records began, though less deep than previous downturns in 2008-9 and the 1980s.
“The MPC’s (Monetary Policy Committee) latest projections described a very challenging outlook for the UK economy. It was expected to be in recession for a prolonged period and CPI (Consumer Price Index) inflation would remain elevated at over 10 per cent in the near term,” the Bank noted.
The interest rate hike means borrowing costs are at their highest since the financial crisis of 2008 and the cost of living is rising at its fastest rate in 40 years, leaving households struggling with bills.
“From where we stand now, we think inflation will begin to fall back from the middle of next year, probably quite sharply, Bank of England Governor Andrew Bailey told reporters.
“To make sure that happens, Bank rate may have to go up further in the coming months… but by less than currently priced in financial markets. That’s important, because it means the rates on new fixed-term mortgages should not need to rise as they have done,” he said.
A recession is defined as a country’s economy shrinking for two three-month periods in a row, which means companies make less money, wages fall and unemployment rises. The UK economy’s “challenging” downturn is expected to continue next year and into the first half of 2024, the central bank cautions.
In response to the Bank of England outlook, UK Chancellor Jeremy Hunt said inflation is the “enemy” which was “weighing heavily on families, pensioners and businesses” and the government’s number one priority was to “grip inflation”.
Interest rates are rising across the world as countries manage rising prices largely driven by the COVID-19 pandemic and [Russian President] Putin’s invasion of Ukraine, said Hunt.
“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, he said.
An increase in interest rates make it more expensive to borrow money and therefore expected to encourage people not to spend money which would ease the pressure on prices and inflation. While the latest rate rise will be welcomed by savers, it will have a knock-on effect on household mortgages, debt repayment and bank loans, making the overall forecast gloomy for households
