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Interest rate hike as recession looms

As interest rates rise to 1.75 percent, households across the UK are faced with an increasingly bleak economic picture.

This week, public concerns over the economy have deepened over the announced rise in interest rates to 1.75 percent. The Bank’s governor, Andrew Bailey, justified the change in monetary policy as a necessary step to control rapidly rising inflation – which currently stands at 9.4 percent. The gloomy economic outlook for millions of people across the country is worsening as families deal with the cost-of-living crisis and worrying forecasted energy prices this winter.

The announced tightening of monetary policy is largely to be expected as an effort to tackle the damaging inflation to household incomes. Rising interest rates tend to hurt demand as borrowing costs rise but much of the inflation witnessed in the UK is on the supply side and out of the Bank’s control – a consequence of the energy price spike following Russia’s invasion of Ukraine.

In this regard, the pressure increasingly mounts on the next Conservative leader who will inherit a bleak economy – unable to ‘steady the ship’ given Moscow’s resilience to push its energy warfare on the West and Europe. As wages are failing to rise with the record-breaking inflation, civil unrest and increased trade union activity has been seen in recent weeks – a trend that will likely increase as the economic crisis develops.

The Bank’s decision

In response to the rise of interest rates, Mr. Bailey said: “The real risk we’re responding to is that inflation becomes embedded and it doesn’t come down in the way that we would otherwise expect.

“We’ve had a domestic shock, we’ve had a shrinkage in the labour force over the last two years or so,” he said.

“The first thing that businesses want to talk to me about is the problems they’re having hiring people… They’re also saying to us, actually they’re not finding it difficult to raise prices at the moment. Now we think that can’t go on.”

He also warned against high pay rises, saying this would make inflation worse and “it’s the people who are least well off who are worse affected because they don’t have the bargaining power”.

Critics have pointed out obvious public concerns that the rise in the cost of borrowing on top record inflation will impact public spending, thus stagnating growth as the demand-side of the economy comes to a halt.

However others have been critical that the rise in interest rates won’t go far enough or has been implemented too late. In particular Attorney General Suella Braverman has said interest rates “should have been raised a long time ago”.

In response, Mr Bailey replied: “If you go back two years… given the situation we were facing at that point in the context of Covid, in the context of the labour market, the idea that at that point we would have tightened monetary policy, you know I don’t remember there were many people saying that.”

The Government’s reaction

Many have critiqued the Prime Minister, Boris Johnson and Chancellor of the Exchequer, Nadhim Zahawi for being on holiday whilst the Bank of England announced the rate hike. As parliament currently sits in recess, the holiday of the existing cabinet’s top figures have come at a

However the Chancellor swathed away claims he was not reacting to the changes in the economy, stating “there is no such thing as a holiday and not working.

“Millions of us dream about getting away with our families, but the privilege and responsibility of public service means that you never get to switch off, that’s why I have had calls and briefings every day and continue to do so.”

The PM’s official spokesperson confirmed last week that Mr. Johnson would be going on holiday from Wednesday despite only having a little over a month left in office.

Final thought

Whilst the Prime Minister and Chancellor enjoy a holiday break, the wider Conservative party – which seeks new leadership under Liz Truss or Rishi Sunak – should be deeply concerned over the economy. Whilst the tightening monetary policy by the Bank of England is perhaps a necessary measure to ease demand-side inflation – this won’t tackle the overwhelming supply-side pressures from the war in Ukraine and current oil prices. It seems the UK economy has only begun its journey into an economic downturn – with a recession and further inflation expected next year. With levels of trade union unrest not seen since the 1970s, the inbound leadership under Ms. Truss or Mr. Sunak has an increasingly steep mountain to climb.

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