Image Source: Bloomberg
In a statement warning that the UK may already be in a recession, the Bank of England increased interest rates from 1.75% to 2.25%, the highest level in 14 years.
The Bank has increased rates for the seventh time in a row as it fights to control rising prices.
Since 2008, when the UK banking sector was in danger of collapsing, the move has increased borrowing prices to their greatest level.
Since December, interest rates have risen in tandem with the accelerated increase in living expenses.
With the rate of inflation currently at 9.9%, it is the highest it has been in almost 40 years, and many people are struggling.
Despite government efforts to rein in skyrocketing gas and electricity rates for homes and businesses, living expenses are widely expected to rise in October.
The cost of borrowing becomes more expensive when interest rates are raised, which should, in theory, motivate consumers to cut back on their spending and lower prices.
Some economists had anticipated a larger increase from the Bank of 0.5 percentage points to 2.25%.
In line with similar actions by the US Federal Reserve and the European Central Bank, some had predicted it would increase rates by 0.75 percentage points.
There are worries, meanwhile, that a rate increase that is implemented too quickly may hinder economic expansion.
In announcing its rate decision, the Bank’s Monetary Policy Committee (MPC) predicted that the UK economy was already in a recession. That is what is meant when an economy contracts for two straight quarters.
The MPC predicted that the UK GDP would contract by 0.1% in the third quarter, which runs from July to September. This comes after a 0.1% decline in the second quarter.
According to the Bank, the government’s action to subsidize home bills through the Energy Price Guarantee was “expected to restrict significantly further increases,” it said in a revision to its inflation forecast.
Previously predicted to hit 13% in the following month, it anticipates inflation to peak slightly under 11% in October.
Even if inflation peaks in October, it is predicted to continue above 10% “over the following few months” before beginning to decline. Nevertheless, inflation is presently close to five times the Bank of England’s 2% target.
Even though interest rates are at a 14-year high right now, they are still considered low historically.
Bank of England tries to mitigate the downturn
After the financial crisis, borrowing rates have remained at, or nearly at, record lows because of the Bank of England’s intervention in the form of rate cuts in response to the UK’s decision to exit the EU in 2016 and the Covid epidemic.
The Bank of England has kept up its trend of raising interest rates, but the actual issue at hand is how high they will rise. According to financial markets’ predictions, the rate will likely approach 5%, which is greater than in the US and the Eurozone. This reflects higher inflation.
Today, the Bank refrained from raising the benchmark rate by 0.75 percentage points, as the US Fed had done the previous evening. The UK’s decision to adopt the US’s harsh language against inflation was being watched by foreign exchange markets. However, the vote was close.
Read Also: Inflation in the UK rises to a 14-year high
Thanks to the government’s energy initiatives, the Bank expressed some comfort that inflation would now reach its top of 11% next month. However, despite the fact that the energy shock has subsided, rates are still rising since the Bank believes that further inflation will come from within the British economy.
Now, everyone’s attention is focused on November, when the Bank will compute a fresh forecast to evaluate all of the government initiatives, which lower inflation but increase borrowing, in order to analyze the whole situation.
The home market is already feeling the effects of rising mortgage rates. The Bank holds that a recession is already underway. Rate increases will continue. The question is: Exactly how many?
Opinions expressed by California Gazette contributors are their own.
