Image Source: Bloomberg
The Bank of England said the UK may already be in a recession as interest rates increased from 1.75% to 2.25%, the highest level in 14 years.
The Bank has increased rates for the eighth consecutive time in an effort to rein down rising prices.
Since 2008, when the UK banking sector was in danger of collapsing, borrowing costs have increased as a result of the change.
Living expenses have been increasing at a higher rate than interest rates since December.
With inflation at 9.9%, which is the highest level in almost 40 years, many individuals are currently experiencing financial difficulties.
In October, it is widely expected that living expenses would rise as well, despite efforts by the government to rein in skyrocketing gas and electricity costs for consumers and businesses.
Raising interest rates makes borrowing expensive, which, in theory, should encourage individuals to cut back on their spending and lower prices.
Fewer economists anticipated a 0.5 percentage point increase in the Bank’s interest rate to 2.25%.
Rate increases of 0.75 percentage points were predicted, in line with comparable actions taken by the US Federal Reserve and the European Central Bank.
Some worries escalating rate increases could stifle economic expansion.
The Monetary Policy Committee (MPC) of the Bank predicted that the UK economy was already in recession when it announced its rate decision. When an economy contracts for two quarters consecutively, it is what is meant by that.
The MPC predicted that the third quarter, or July through September, would see a 0.1% decline in the UK economy. It had previously shrunk by 0.1% in the previous quarter.
The Bank also updated its inflation forecast, stating that the Energy Price Guarantee, a government program to subsidize residential bills, was “expected to restrict significantly further increases.”
It had predicted that inflation would hit 13% the following month, but now anticipates a peak of slightly under 11% in October.
Even if it peaks in October, inflation is presently close to five times the Bank of England’s 2% target and is predicted to stay above 10% “over the coming few months” before beginning to decline.
Despite being at a 14-year high, historical standards still consider interest rates modest.
As a result of the Bank of England’s intervention with rate cuts in the wake of the UK’s decision to leave the European Union in 2016 as well as during the Covid epidemic, borrowing costs have remained at, or nearly at, record lows since the financial crisis.
The Bank of England has maintained raising interest rates, but the real question at this point is how high they will rise. According to financial markets, the rate is expected to be around 5%, which is higher than in the US and the Eurozone. This reflects higher inflation in this location.
In contrast to what the US Fed did last night, the Bank refrained from raising the benchmark rate by 0.75 percentage points today. So markets for foreign exchange were watching to see if the UK would adopt the same harsh stance against inflation as the US. But the vote was quite close.
The Bank of England expressed some comfort that inflation would now peak at 11% next month due to the government’s energy initiatives. However, even though the energy shock has subsided, rates are still rising because the Bank believes that the British economy will continue to experience inflation.
All eyes are now on November when the Bank will determine a fresh forecast to evaluate all government measures, which lower inflation but increase borrowing, to analyze the whole situation.
The property market is already being affected by the increase in mortgage rates. According to the Bank, a recession has already begun. The rate increases will not stop. The question is how many exactly.