Longest Recession Since The 1930’s – Warning By The Bank of England
Concerns That The UK Economy May Enter A Longer Deeper Recession Have Led To The Highest Interest Rate Increase Since 1989!
Despite forecasting that higher interest rates would send the economy into its deepest slump since the 1930’s, the Bank of England boosted borrowing costs by 0.75 percentage points to 3%.
In a 7-2 decision, the Monetary Policy Committee (MPC) of the central bank decided to raise interest rates to their highest level since 1989 in order to battle an inflation rate that reached 10.1% in September.
The Bank decided to raise interest rates in response to recent increases by the US Federal Reserve and the European Central Bank, blaming the rises on increasing energy costs and a tight domestic labour market.
In 1989, rates climbed by more than 0.5% for the last time. During the exchange rate mechanism crisis of 1992, John Major’s administration was compelled to implement a 2% increase, albeit it only lasted for a little over 24 hours before being withdrawn.
The MPC stated that the economy was already contracting and would continue to contract for eight consecutive quarters to the summer of 2024 if interest rates continued to rise as financial markets anticipated. This was without accounting for the likely squeeze on government spending that chancellor Jeremy Hunt would impose in his budget on November 17, which could worsen the outlook for economic growth.
The Bank anticipates that the rate of inflation, which reached 10.1% in September, would peak at 11% by the end of 2022 before declining “probably quite sharply” starting in the middle of 2023.
A two-year recession that will be as long as or perhaps longer than the depression of the 1930’s is anticipated as a result of forecasted reductions in consumer spending and business confidence.
Conservative MPs are likely to be concerned at the forecast, which shows the economy only just reviving before a general election expected in the second half of 2024 and the economy growing only modestly in 2025.
As a result of the war in Ukraine, which has limited the availability of gas and driven up the price of vital commodities globally, inflation has exploded in the majority of developed economies.
High energy costs combined with a labour shortage in some key industries have had a negative impact on Britain, raising fears about rising wages.
As the impact of the war on gas and other commodity prices grew, the Bank of England increased its rate rises.
Investors anticipated interest rates would peak at 5.25% after the financial market instability that followed Liz Truss’ mini-budget, but by the time of the November MPC meeting, they had already lowered that prediction to 4.75%.
The pessimistic predictions are anticipated to be read by financial markets as a limitation on interest rate increases in the upcoming year, probably to no more than 4%.
Critics of the central bank are expected to argue that further interest rate rises are unnecessary when the MPC’s central forecasts show inflation falling below its 2% target in 2024 should interest rates remain at 3%.
The Bank’s report said: “The economy has been subject to a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, consumer prices index inflation will return to the 2% target sustainably in the medium term.”
It did add, though, that the prognosis for the economy had a lot of moving parts, both domestically and in terms of the global economy, which made predicting economic growth for the following year challenging.
“There are considerable uncertainties around the outlook. The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
While the projected 300,000 consumers who must refinance this month will discover that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis, homebuyers with tracker or variable rate mortgages will feel the sting of the rate increase immediately.
The average two-year fixed rate was 6.47% before the MPC meeting, down from 6.65% in mid-October as the impact of the catastrophic Kwasi Kwarteng mini-budget subsided, but it is still three times higher than the rate provided by lenders earlier this year. On 20th October, a five-year fixed rate mortgage was available for 6.51%, it’s now only slightly better at 6.31%.
According to the Bank, refinancing mortgage payments will result in an increase in interest payments of £3,000 per year for mortgage holders. Private rents are also anticipated to rise significantly as a result of the MPC decision.
By a vote of seven to two, the nine-member MPC approved a 0.75 percentage point hike; two of the committee’s former LSE (London School of Economics) economics professors voted in favour of a lesser increase. Swati Dhingra backed a 0.5 percentage point increase, while Silvana Tenreyro voted for a 0.25 point increase.
online sources: theguardian.com, reuters.com
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