With the economy on a downward spiral, the Bank of England has forecast that the UK could face its longest recession since records began. The central bank - which has been independent since 1997 - deployed the biggest interest rate hike for 33 years.
On Thursday, the Bank of England raised interest rates from 2.25% to 3%. The 0.75% jump is the eighth interest rate rise since last year as the Bank takes unprecedented steps to control the country’s double digit inflation.
Governor of the Bank of England, Andrew Bailey said: “We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets."
“If we do not act forcefully now it will be worse later on."
By hiking interest rates, the central bank aims to discourage borrowing and incentivise saving, which will help depress inflation and bring down the soaring prices associated with the cost of living crisis.
Grocery price inflation has now hit a record 13.9% with manufacturers facing challenges in increased production, ingredient and packaging costs. Everyday household essentials such as vegetable oil, pasta and bread have rocketed in price by up to 65.2%, the ONS revealed this week, with the Russia-Ukraine war continuing to push up costs.
What is a recession?
A recession is typically declared when a nation see’s a prolonged period of economic downturn with its economy shrinking for two-three quarters in a row. The cause is negative GDP and it often coincides with rising levels of unemployment, combined with stagnated growth and falling business sales.
A recession can be caused by unexpected global events, debt, excessive inflation and alternatively, when prices become too low and companies stop investing.
The bank has said the UK economy faces a “very challenging outlook”, with fears the recession could last until the middle of 2024. The Chancellor of the Exchequer, Jeremy Hunt responded that this is a global issue “as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine”.
The interest rate hike is yet another round of action taken by the Bank of England to calm market turmoil and will be the biggest increase in rates since Black Wednesday in September 1992.
Liz Truss and Kwasi Kwarteng’s mini-budget - announced on 23 September - pledged £45bn of tax cuts but relied heavily on government borrowing. Kate Andrews, the economics editor of the Spectator, said “Rising interest rates is a key pillar of Trussonomics.”
While the Bank of England boss told the BBC, the mini-budget had “damaged” the country’s reputation on the international stage. “It was very apparent to me that the UK’s position and the UK’s standing had been damaged,” said Bailey.