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March 29, 2024
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Bank of England says the UK is possibly in recession

The Bank of England has increased interest rates from 1.75% to 2.25%, the highest level in 14 years, and issued a warning that the UK may already be in a recession.

The Bank of England has increased rates seven times in a row as it fights to control rising costs.

The decision raised borrowing prices to their highest level since 2008, when the UK banking system was in danger of collapsing.

Since December, interest rates have increased as living expenses have risen more quickly.

At 9.9%, inflation is currently at its highest level in almost 40 years, making life difficult for many.

Despite government efforts to rein in skyrocketing gas and energy rates for homes and businesses, living costs are also widely expected to rise in October.

Raising interest rates makes borrowing expensive, which should, in theory, encourage individuals to save money and lower costs.

The Bank’s increase of 0.5 percentage points to 2.25% was less than some economists had anticipated.

Rate increases of 0.75 percentage points had been predicted, in line with comparable actions taken by the US Federal Reserve and the European Central Bank.

However, there are worries that hiking rates too quickly could hinder economic expansion.

The Monetary Policy Committee (MPC) of the Bank predicted that the UK economy was already in a recession when it announced its rate decision. When the economy contracts for two quarters consecutively, that 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’s economy. This comes after it shrank by 0.1% in the second quarter.

The Bank also updated its forecast for inflation, stating that the government’s action to subsidize household bills through the Energy Price Guarantee was “expected to limit significantly further increases.”

It earlier predicted that inflation would hit 13% the following month but now anticipates that it would reach a peak of slightly under 11% in October.

Nevertheless, inflation is already close to five times the Bank of England’s 2% objective, and even if it peaks in October, it is predicted to stay above 10% “over the following few months” before beginning to decline.

Although interest rates have reached a 14-year high, they are still considered low by historical standards.

The Bank of England tries to mitigate the situation

After the financial crisis, borrowing rates have remained at, or almost at, record lows 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.

The Bank of England has maintained raising interest rates, but the real question at this point is how high they will go. According to financial market predictions, the rate will likely approach 5%, which is higher than in the US and the Eurozone. This reflects higher inflation in this area.

As the US Fed had done last night, the Bank refrained from raising the benchmark rate by 0.75 percentage points today. The UK’s decision to adopt the US’s harsh language against inflation was being watched by currency markets. However, the vote was quite close.

The Bank expressed some relief that, as a result of the government’s energy initiatives, inflation would now reach its top of 11% next month. However, even though the impact of the energy shock has subsided, rates are still rising since the Bank expects further inflation to come from within the British economy.

All eyes are now on November when the Bank will compute a fresh projection to evaluate all of the government initiatives, which lower inflation but increase borrowing, and appraise them.

Read Also: Inflation in the UK reaches highest in 14 years 

The property market is already suffering from the increase in borrowing rates. The Bank believes that a recession is already underway. Therefore, the rate increases will continue. The question is: How many exactly?

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