Image Source: Bloomberg
As it raised interest rates by the highest in 33 years. The Bank of England warned that the UK is facing its most prolonged recession since records began.
It said that the UK would face a “tough” two-year slump and that by 2025, unemployment would almost double.
Andrew Bailey, the head of the bank, said that things would be hard for UK households. But that the government had to act quickly or things would get worse later.
It raised interest rates from 2.25% to 3%, which was the most significant jump since 1989.
The Bank is trying to stop prices from increasing quickly by raising interest rates. This is because the cost of living is going up at its fastest rate in 40 years.
Food and energy prices have increased partly because of the Ukraine war. This has made life difficult for many people and has slowed the economy.
It becomes a recession when an economy shrinks for two three-month periods, or quarters, in a row.
Companies usually make less money, pay decreases, and unemployment increases. This means the government gets less tax money for things like health care and education.
Before, the Bank thought that the UK would go into recession at the end of this year and would last for all of next year.
But it now thinks the economy is in a “challenging” downturn that started this summer and will last through next year and the first half of 2024, which could be an election year.
The worst recession in a century
The Bank said this wouldn’t be the UK’s worst recession, but it would be the longest one since the records began in the 1920s.
The jobless rate is at its lowest point in 50 years, but it is expected to go up to almost 6.5%.
Since former Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng released their controversial mini-Budget in September. This is the first time the government is making interest rates public.
Their plans for unfunded tax cuts worth £45 billion, most of which have been rolled back, sent the pound’s value plummeting and caused chaos on the market. The Bank of England had to step in to calm things.
Mr. Bailey told the BBC that the mini-budget had hurt the UK’s global reputation.
He said it was evident at a recent meeting of the IMF in Washington that the UK’s position and reputation had been hurt.
Prime Minister Liz Truss fired Mr. Kwarteng from his job the same week.
With the most recent rate hike, the Bank’s eighth since December, the cost of borrowing money is now higher than in 2008 when the UK banking system was close to failing.
The Bank thinks that raising interest rates will make it more expensive to borrow money and make people less likely to spend money, making prices go down.
But while savers will be happy about the latest rate increase, those with mortgages, credit card debt, and bank loans will be hurt.
UK residents worry
The UK economic realities worries Mortgage holders. The Bank thinks that people whose fixed-rate deals are ending could see their annual payments go up to £3,000 if interest rates keep increasing.
It said that interest rates would go up if inflation stayed high. The financial markets thought that rates would peak at 5.25 percent. But the Bank doesn’t think they will go this high.
The Bank of England will decide on interest rates. Before the government announces its plans for taxes and spending at the Autumn Statement on November 17.
On Thursday, the pound fell 2% against the dollar, and the Bank’s warnings caused the cost of borrowing money for the government to go up.
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Even though the government’s borrowing costs and the pound’s value have somewhat recovered after a series of U-turns. There is still some stress in the mortgage market and business loans, which adds to the long-term economic hit.
The forecast says that the unemployment rate will increase and household income will decrease.
The economy is going through a hard time, and the UK is doing worse than the US and the Eurozone.
Three months ago, experts predicted a sharp energy recession, now it is a longer energy and mortgage shock.