The Bank of England warned on Thursday that Britain will face its longest recession since record keeping began.
The institution raised interest rates from 2.25% to 3% on Thursday, the biggest rise since 1989, and warned that the United Kingdom faces a “very challenging” scenario for the economy and that unemployment will practically double by 2025.
The bank’s governor, Andrew Bailey, warned of a “difficult road ahead” for the country’s households, but said it had to act firmly now or “things will be worse later.”
By raising rates, the bank is trying to reduce high inflation, which stands at 10.1% per year, a 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 these credits and, therefore, reduces upward price pressures 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, partly because of the war in the 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 like health and education.
Previously, 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 through next year.
The Bank of England in London, which this Thursday decided to increase interest rates to 3%.
But now he believes the economy entered a “challenging” recession as early as last summer, which will continue into next year and continue through the first half of 2024, a potential general election year.
While it will not 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 measure
After learning of the central bank’s decision, Finance Minister Jeremy Hunt said that “the most important thing the British government can do at this time is to restore stability, put our public finances in order and reduce debt so that interest rates keep it as low as possible.”
But the shadow area minister, ie the opposition-appointed counterpart to control the government, Rachel Reeves, said households will not be able to bear such high rate increases. “We have rising food prices, rising energy bills and now higher mortgage rates as well,” she said.
The rate decision comes before the government unveils its fiscal and spending plans under new prime minister Rishi Sunak on 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 (about $50.45 billion) tax cut plans, many of which have already been reversed, sent the value of sterling down and caused market turmoil, forcing the Bank of England to intervene. to restore calm.
On Thursday, the pound plunged 2% against the dollar and the cost of government borrowing rose in response to the bank’s warnings.
A painful economic period
The Bank of England did something it doesn’t normally do in published minutes of its decisions: it gave guidance that appears to suggest an interest rate cap of around 4.5 percentage points next fall.
For those who see a glass as half full, this is less than the 6% assumed just a month ago in the market turbulence following the announced budget cut.
While government borrowing costs and the level of the pound have recovered somewhat after a series of reversals since then, mortgage and commercial lending markets are still showing some tension, adding to the lingering impact on the economy. .
The forecast predicts that the unemployment rate will increase, while household income will also decrease.
It’s a picture of a painful economic period, with the UK performing worse than the US or the Eurozone.
In fact, what was forecast to be a severe energy recession just three months ago is now a shallower, but longer lasting, energy and mortgage shock.
