As the Bank of England announces another rise in interest rates, we examine the outlook for the UK economy as a long recession looms.
On Thursday 3rd November, the Bank of England announced that they would be raising interest rates from 2.25% to 3%. The news came as a result of the cost-of-living crisis that has seen inflation reach over 10%.
It is the first time since 1989 that interest rates in the United Kingdom have been raised by more than 0.5% and is the first time in nearly 15 years that the rates have been this high. The financial turmoil caused by the mini-budget six weeks ago left the Bank of England with little choice.
The impact of this hike will be felt most by homeowners who are looking to remortgage as well as first-time buyers. Mortgage costs will increase significantly, meaning life is only going to get more difficult for the average household.
Bank of England Governor, Andrew Bailey said:
“This is a difficult time and there is no easy outcome. However, if we do not act forcefully now, it would be worse later on.”
Bank of England forecast
In addition to the interest rate rise, the Bank of England has released a forecast which predicts the economic future of the country. One key takeaway from this forecast is that the country is predicted to enter into a record-long recession over the next two years.
In what would be the longest recession since the great depression of the 1930s, it is expected to last until early 2024. They are predicting that unemployment rates will double as a result of businesses being forced to close down or cut costs.
Another important takeaway from the Bank of England forecast is that inflation is expected to hit a record 11% this winter. In some positive news, it is then expected to drop throughout 2023.
Further interest rate increases are also expected in the future as the government try to fight soaring inflation.
On these forecasts, Andrew Bailey admitted that there is a “tough road ahead”. He blamed the sharp increase in energy prices for making the country significantly poorer, but he is confident that the economy will recover in time.
Poorest households will suffer the most
The rise in interest rates and the bleak economic forecast is going to affect the poorest households more than anyone. The Resolution Foundation, A think tank which focuses on low to middle-income households, has stated that the current cost-of-living crisis will affect more than just homeowners. Its Research Director, James Smith, said:
“Everyone will be affected by prolonged double-digit inflation, but poorer households will be hit hardest by the surge in food prices and energy bills.
The government needs to both calm the markets, while also protecting households from the worst of the cost-of-living storm.”
Chancellor of the Exchequer, Jeremy Hunt, was brought into the role after his predecessor, Kwasi Kwateng, announced a mini-budget which sent the pound tumbling. Upon learning about the interest rate increase, he blamed inflation. The Chancellor said:
“Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country.
“That is why this government’s number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.
“Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine.
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.”
View from the opposition
Labour Leader, Sir Keir Starmer, has blamed the Conservative government and their failure to keep a lid on rising costs for this new hike in interest rates. He said:
“Many families are going to be really worried by this news. It means hundreds of pounds on their mortgages, much higher bills they’ve got to pay, on top of the struggles they’ve got at the moment.”
“We’re more exposed in the UK than other countries and that’s because for 12 years there’s been a failure to grow the economy as we needed it.”
Shadow Chancellor, Rachel Reeves, echoed Sir Keir’s sentiments and said the time has come for Rish Sunak to “face up to his mistakes”. She added
“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of our economy.”
It feels like there is more bad news each and every day when it comes to the current economic situation in the United Kingdom. This latest interest rate hike is yet another hammer blow to people up and down the country who have enough money worries as it is.