UK to enter recession as inflation soars over 13% & Interest Rate Hike by Bank of England

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The Bank has cut its growth forecasts, and now sees the economy falling into recession from the October-December quarter.

In a grim warning about the economic outlook, it says:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

The Bank of England has hiked the interest rate to 1.75 per cent in the biggest increase for 27 years.

The cost-of-living crisis will continue throughout next year and only begin to ease in 2024, with the UK economy contracting for five consecutive quarters, according to the Bank’s latest forecasts

Such a move would take borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point hike since it was made independent from the British government in 1997.

Announcing today’s interest rate decision, it says the surge in gas prices mean inflation will be even higher than previously feared.

Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.

As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

A more aggressive approach at Thursday’s meeting would bring the Bank’s monetary tightening trajectory closer to the trend set by the U.S. Federal Reserve and the European Central Bank, which implemented 75 and 50 basis point hikes last month, respectively.

But while it may fortify the Bank’s inflation-fighting credibility, the faster pace of tightening will exacerbate downside risks to the already-slowing economy.

Berenberg Senior Economist Kallum Pickering said in a note Monday that Governor Bailey will likely carry a majority of the nine-member MPC if he backs a 50 basis point hike on Thursday, and projected that with inflation likely still rising¸ the Bank will hike by another 50bp in September.


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What are interest rates?

An interest rate tells you how high the cost of borrowing is, or high the rewards are for saving.

So, if you’re a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan. The higher the percentage, the more you have to pay back, for a loan of a given size.

If you’re a saver, the savings rate tells you how much money will be paid into your account, as a percentage of your savings. The higher the savings rate, the more will be paid into your account for a given sized deposit.


What is Bank Rate?

‘Bank Rate’ is the key interest rate in the UK. It is our job to set this interest rate.

It is important because it influences many other interest rates in the economy.  That includes the lending and savings rates offered by high street banks and building societies.

Bank Rate is currently 1.25%.


Why are there so many different interest rates?

The number of different interest rates available when you borrow or save can be confusing.

The interest rates high street banks set depend on more than just Bank Rate.

For loans, other factors are considered, including the risk of the loan not being paid back.

The greater the lender thinks that risk is, the higher the rate the bank will charge. It can also depend on how long you want to take out a loan or mortgage for.


Why do interest rates matter to me?

If interest rates rise, borrowing could become more expensive for you. Whether you are looking to get a mortgage to buy a house, or a new car on credit, it’s crucial to think about what higher costs mean for you.

Imagine you have a £130,000 mortgage that you want to pay off over 25 years. If the interest rate on the mortgage is 2.5%, the monthly repayment will be £583.

But if the interest rate is 1% higher, the monthly repayment will be higher, at £651.

Of course, interest rates can go down as well as up. If the mortgage interest rate was 1% lower, the monthly repayment would be around £520.



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