Interest Rate Hikes, Inflation, and Recession in the United Kingdom
~ Friday, November 4, 2022 Blog Post ~
I went over my Facebook feed yesterday morning to check the day’s business and finance news. I gathered that the likelihood of a prolonged recession in the United Kingdom is getting more pronounced at this point.
Additionally, I learned that the interest rate will be further hiked by the Bank of England. Mentions of the Russia-Ukraine war and inflation were made by Andrew Bailey, Governor of the Bank of England.
People will have to prepare themselves as the United Kingdom is forecast to be in a recession until 2024. Here are three relevant videos from British news channel Sky News:
I also want to share two related news articles from Express.co.uk:
[1] Bank of England raises interest rates to 3% — UK now facing longest ever recession
The Bank of England has confirmed yet another interest rate rate rise to three percent.
By PATRICK O’DONNELL, 11:34, Thu, Nov 3, 2022 | UPDATED: 14:41, Thu, Nov 3, 2022
This represents the biggest interest rate in 33 years as the financial incision attempts to prevent the country from nose-diving into a recession. Earlier today, the Bank of England’s Monetary Policy Committee (MPC) met to discuss the UK’s base rate. Over the last couple of months, the central bank has consecutively raised the base rate which is now at 2.25 percent.
Interest rates have been rising consecutively over the last couple of months amid the continuing cost of living crisis. While the Bank of England’s MPC has chosen to continue doing this for this month, many will be wondering how long the base rate will continue to increase in the coming months.
This has been done to mitigate the damage caused by inflation on the economy, which is currently at 10.1 percent.
In its announcement, the Bank of England’s MPC stated: “If high inflation continues, it will hurt everybody. Low and stable inflation helps people plan for the future. Raising interest rates is the best way we have to bring inflation down.
“We know that many people are facing higher borrowing costs. In particular, many households face higher mortgage rates. And some businesses face higher loan rates. It’s our job to make sure that inflation returns to our two percent target. In total, since December 2021, we have increased our interest rate from 0.1 percent to three percent.”
The central bank noted that it expects inflation to “fall sharply” towards the middle of 2023 which will likely cause rates to drop also.
However, today’s decision by the Bank of England was not a unanimous one with some members of the MPC disagreeing with the move. Overall, seven policymakers voted on increasing the base rate by 75 basis points to three percent.
One member of the committee, Swati Dhingra, voted for a half-point rise to 2.75 percent, while Silvana Tenreyro lobbied for an increase to 2.5 percent.
This would have been a significantly smaller interest rate rise from last month’s increase of 0.5 percent, which took the base rate to 2.25 percent.
As part of today’s rate rise, the Bank of England warned the UK was already in recession and will continue to be for a “prolonged period”. On top of this, unemployment in the country is expected to rise with forecasts suggesting the rate will reach 6.5 percent by late 2025.
In reaction to today’s announcement, the Chancellor Jeremy Hunt said: “Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine.
“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.”
Savers are likely to receive a boost on their returns following the decision, as they have done in months past. However, concerns have been raised at the potential repercussions this will have on mortgage holders and people with debt.
Following the economic turmoil resulting from Liz Truss’ premiership, the country will be looking to new Prime Minister Rishi Sunak to calm the markets, and address the UK’s soaring base rate and inflation.
Experts are sounding the alarm that further tax rises and spending cuts may result in a recession even worse than anticipated. Joshua Raymond, the director at online investment platform XTB.com, outlined how the market is reacting to the news.
Mr Raymond said: “We’ve seen investors move quickly to strongly sell out of the pound in the immediate reaction to the BoE’s 0.75 percent interest rate hike, the biggest hike for 33yrs.
“The pound fell around one percent against the US Dollar in volatile trade and hit its lowest levels against the euro in a week. That reaction tells you investors are disappointed not necessarily in this hike alone but the guidance from the central bank that rates won’t need to rise much further to contain higher inflation.
“We should remember that the market has long deemed the Bank of England’s response to inflation and far too slow and too weak. The new guidance is likely to be seen as a return to that interpretation.
“And the troubling part is, should the BoE be correct and not need to hike rates much further, its more likely to do with the severity of the recession the Bank itself says the UK is already in. That’s also bad news for the pound.”
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, shared how inflation is factoring into the Bank of England’s decision-making. Ms Steeeter explained “The price spiral is tough, particularly with labour shortages fuelling wage growth and volatile energy prices to navigate. However, they no longer have to deal with the threat of a mass tax cut fuelled by a burst of stimulus.
“Instead, we have a new Chancellor flagging that spending will be reined in, just at the moment consumer confidence is plummeting and the housing market is going into shock. Inflation may well now peak above 11 percent with scorching food prices in particular pushing up expectations.”
Greg Marsh, the CEO of Nous.co, added: “This sort of rise is much less affordable than it was back in the 1980s. While three percent base rate may not look like a big number, loan-to-value ratios are far higher than they were 30 years ago, which makes this situation much more serious than it first appears.
“Worse still, the last time interest rates had this much effect on household finances, mortgage interest relief at source (MIRAS), helped to take the edge off.
“This all comes just as taxes are likely to rise still further — while the cost of everything from food to energy continues to soar.
“This is a troubling time for millions of people with a mortgage — and things are only likely to get worse.”
Laura Suter, AJ Bell’s head of personal finance, outlined how savings accounts will likely get a boost following this rate hike.
Ms Suter said: “Savers are the big winners of a rising interest rate environment, as the Bank of England increases rates the interest rates offered on cash accounts will rise too.
“However, savers always have to shop around to get the best rates. If you leave your money in an old savings account, your bank might increase your rates slightly but you’ll be getting far less interest than the market-leading account.
“Also, rates will rarely rise as high as the cost of borrowing. Banks make their profits on the difference between the interest they charge people for borrowing money and the interest they hand out to savers — this is also why rates on savings accounts tend to go up at a slower pace than borrowing costs in a rising interest rate environment.”
What is inflation and how does it affect you?
Inflation is when the cost of goods and services goes up compared to the previous year. Many countries are experiencing high levels of inflation right now, which means their expenses are rising sharply.
The Bank of England aims to keep inflation at two percent, but it has been much higher than that for several months. High inflation is damaging for the economy because it means people are less likely to spend money, making it difficult for businesses to grow.
[2] UK to face longest recession since the 1930s — what it means for you and your money
The UK is preparing to face its longest recession since the 1930s but how will people be affected?
By PATRICK O’DONNELL, 16:11, Thu, Nov 3, 2022 | UPDATED: 16:15, Thu, Nov 3, 2022
Earlier today, the Bank of England announced it was raising the country’s base rate from 2.25 percent to three percent. This is despite the central bank forecasting that higher interest rates will push the country into a long-lasting recession.
Interest rates have been raised over consecutive months in a bid to combat inflation, which has skyrocketed following the pandemic and war in Ukraine.
What is a recession?
In its announcement, the Bank of England stated that Britain would face a “very challenging” two-year economic downturn.
At the same time, the financial institution confirmed that the UK was already in recession and will be for a “prolonged period”.
A recession is the term used to describe when a country’s economy shrinks for two three-month periods — or quarters — in a row.
Those with savings and mortgages will be looking for clarification about what this development means for them after already having to deal with the cost of living crisis.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, outlined the economic reality for the country going forward.
Ms Coles explained: “The Bank of England threw a black cloud over the UK economy today, shrouding it in gloom.
“It warned that we’re set for a miserable recession throughout next year and the first half of 2024.
“While this will dampen inflation, it will also pour a bucket of cold water on the labour market, so after such a long period of our wages falling behind inflation, we run the risk of losing those wages altogether.”
How will this affect savings and borrowing?
Thanks to the Bank of England’s consecutive base rate hikes, high street banks and building societies have been able to pass on this increase to their savings accounts and customers.
However, Ms Coles warns that this will likely not last once the pending recession comes into effect.
Despite this, she notes that those with mortgages and debt payments will pay less interest as a result.
The finance expert added: “For savers this adds insult to injury, because on top of all of their economic woes, they know that rising savings rates aren’t necessarily going to last.
“The small sliver of good news comes for borrowers — who might not see mortgage rates rise as high as they feared.
“The Bank of England currently forecasts that interest rates will rise to 5.2 percent in late 2023, before starting to fall back.
“The pain of inflation isn’t over yet. The Bank of England now expects it to be 11 percent in the last three months of this year, before dropping back from early 2023 as previous energy price hikes drop out of the calculations.”
How will this affect the economy?
Overall, GDP is predicted to drop about 0.75 percent during the second half of 2022, primarily due to rising energy bills.
Forecasts suggest that GDP will continue to fall during 2023, as well as the first half of 2024.
At the same time, wages will dip 0.25 percent behind rising prices this year and 1.5 percent behind in 2023.
Furthermore, the unemployment rate is forecast to hit 5.9 percent at the end of 2024 and 6.4 percent by the end of 2025 — up from 3.5 percent in the three months to August.
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