The Bank of England warned on Thursday that Britain will face its longest recession since record-keeping began.
The institution raised interest rates this Thursday from 2.25% to 3%, the biggest rise since 1989and warned that the UK faces a “very challenging” scenario for the economy and unemployment it will practically double by 2025.
The bank’s governor, Andrew Bailey, warned of a “hard road ahead” for the country’s households, but said he must act decisively now or things “will be worse later”.
By raising rates, the bank is trying to reduce the high inflation, which stands at 10.1% per yeara rate of increase in consumer prices not seen in the last 40 years, and wants it to be around 2%.
Economic theory indicates that if interest rates are higher, requesting a bank loan becomes more expensive, which discourages taking those credits and, therefore, reduces upward pressure on prices on the side of greater demand. .
On the other hand, it encourages saving, since investing money instead of spending it gives better rewards. That, too, reduces demand.
As in other countries, food and energy became more expensive, in part due to the war in ukraine.
A recession is defined as the contraction of economic activity in a country for two consecutive quarters.
Typically, during a recession, businesses make less money, wages fall, and unemployment rises. This means that the State receives less tax money to use for public services such as health and education.
Earlier, the Bank of England had said it expected the UK to enter a recession at the end of this year and that economic phase would last throughout next year.
But now he believes the economy entered a “defiant” recession as early as last summer, which will continue next year and continue into the first half of 2024, a possible general election year.
While it won’t be the deepest recession in its history, it will be the longest since records began in the 1920s, the central bank said.
The UK unemployment rate is at its lowest level in 50 years, 3.5% of the economically active population, but is expected to rise to almost 6.5%.
A controversial move
After learning of the central bank’s decision, Finance Minister Jeremy Hunt said that “the most important thing the British government can do at the moment is to restore stability, get our public finances in order and reduce debt so that interest rates keep it as low as possible.
But the area’s shadow minister, that is, the opposition’s appointed counterpart to check the government, Rachel Reeves, said families won’t be able to stomach such high rate hikes. “We have rising food prices, rising energy bills and now higher mortgage rates as well,” she noted.
The rate decision comes before the government unveils its fiscal and spending plans under the new prime minister, Rishi Sunakon November 17.
It is the first meeting of the monetary policy committee since former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng unveiled their controversial budget cut in September.
His 45 billion pound ($50.45 billion) tax cut plans, much of which has already been reversed, sent the value of the pound tumbling down and caused market turbulence, forcing the Bank of England to intervene. to restore calm.
On Thursday, the pound tumbled 2% against the dollar and the cost of government borrowing rose in response to warnings from the bank.
A painful economic period
Analysis by Faisal Islam, BBC Economics Editor
The Bank of England did something it doesn’t normally do in published minutes of its decisions: It gave guidance that appears to suggest a peak in interest rates of around 4.5 percentage points next fall.
For those who see a glass half full, this is down from the 6% assumed just a month ago in the market turmoil following the announced budget cut.
While government borrowing costs and the level of the pound have recovered somewhat after a series of gyrations since then, mortgage and commercial lending markets are still showing some strain, adding to the lingering impact on the economy. .
The forecast predicts that the unemployment rate will increase, while household income will also decrease.
It is a picture of a painful economic period, with the UK underperforming the US or the Eurozone.
In fact, what was forecast as a sharp energy recession just three months ago is now a shallower, but longer-lasting energy and mortgage shock.