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Interest Rates Expected to Remain at 5.25%

How Will Labour Pay For the £22 Billion ‘Black Hole’?

Interest rates are expected to be left unchanged in November after it was revealed that the UK economy grew by 0.2% in August. Last month, the Bank of England kept interest rates at 5.25% due to inflation slowing down after several months of continuous interest rate hikes and there is nothing to suggest they will revert back to an increase next month.

Although a growth of 0.2% has been described by analysts as “lacklustre”, it should be enough to prevent the Bank of England from going any higher with interest rates for now as the population continues to battle with the ongoing cost of living crisis.

The marginal growth in August was driven by a boom in the education sector following an agreement made between strikers and the government over a new pay deal. The month was quite a non-event in terms of UK economic activity in what has been a hectic year. Darren Morgan, the director of economic statistics at the Office for National Statistics explained:

“Compared with previous months where there’s been a lot of significant factors impacting on the economy both in terms of adding to and reducing growth like the additional bank holiday for the King’s Coronation, a large number of working days lost because of industrial action and extreme weather – sunshine and rain – August was relatively quiet in that sense,”

It wasn’t all positive, though, with the sports and amusement sector dropping 10% in August and the arts, entertainment and recreation sectors all performing poorly. If similar results occur in the coming months then it isn’t out of the question that the rates are raised again at the beginning of next year.

The economic response

Major players in the world of economics have had their say on the current state of the UK economy in recent days.

In an interview with the BBC, Dr Swati Dhingra, who is part of the Bank of England’s rate-setting committee was quite bleak in her assessment of the situation and the future. She said:

“The economy’s already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes has been fed through to the economy. So I think that there’s also this worry that that might mean that we’re going to have to pay a higher cost than we should be paying.”

“When you’re growing as slowly as we’re growing now, the chances of recession or not recession are going to be pretty equally balanced. So we should be prepared for that. It’s not going to be great times ahead.”

Meanwhile, Susannah Streeter from Hargreaves Lansdown said that “we still haven’t felt the full effect of previous rate hikes” and that “the prospects of recession are still looming on the horizon with so little respite expected on sideswiped budgets.”

Danni Hewson, head of financial analysis at AJ Bell, said that she believes that “recession is beginning to feel almost inevitable” and Yael Selfin, Chief Economist at KPMG UK, isn’t optimistic about the future either with “high-interest rates continuing to bite.”

The political response

Predictably, the government have pointed to the latest date as a signal that their efforts to avoid a recession and to grow the economy are working, while opposition parties lambasted them for slow growth.

Jeremy Hunt, the Chancellor of the Exchequer, said that the UK economy is proving to be “more resilient than expected” under his watch, while his direct opponent, Shadow Chancellor Rachel Reeves said:

“Under the Conservatives, Britain’s economy remains trapped in a low growth, high tax cycle that is leaving working people worse off.”

Earlier this week, the International Monetary Fund (IMF) predicted that the UK will have higher inflation and slower growth than any other G7 nation in 2024. The government didn’t take too kindly to this, with the Treasury claiming that recent UK economic growth hadn’t been considered in the forecast.

Final thought

The UK economy’s growth of 0.2% in August may be seen as a positive sign by some, but the reality is that the country is still facing a long and difficult road ahead. The ongoing cost of living crisis and the impact of previous interest rate hikes are still being felt, and the prospect of recession remains a very real possibility.

The Bank of England’s decision to leave interest rates unchanged in November may provide some temporary relief, but it is clear that more needs to be done to address the underlying issues facing the economy.

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