TL;DR Breakdown
- The Bank of England (BOE) will throw the UK into a recession by the end of the year
- If the Bank of England further increases the rates above 5%, economists predict the risk of financial stability shock will grow exponentially.
Description
The Bank of England (BOE), by the end of the year, will throw the U.K. into a recession as it continues to battle the worst inflation faced by any Group of Seven economies, according to a warning from Bloomberg Economics. Notably, despite the BOE’s efforts, making 13 straight interest-rate increases since the end of 2021, … Read more
The Bank of England (BOE), by the end of the year, will throw the U.K. into a recession as it continues to battle the worst inflation faced by any Group of Seven economies, according to a warning from Bloomberg Economics. Notably, despite the BOE’s efforts, making 13 straight interest-rate increases since the end of 2021, the inflation rate has remained high, close to double digits, spreading fear among consumers.
Bank of England could trigger a recession
According to economists Dan Hanson and Ana Andrade, a year-long recession will begin in the fourth quarter to cost about 1% of the economic output. However, this is provided that the BOE will raise the rates to 5.75% by November from the current 5%. There could be a much worse slump considering that money markets are almost fully pricing in 6.25% by December. The economists further explained that the data shows that BOE’s actions and interest rate rises have no positive results. If the Bank of England further increases the rates above 5%, they predict the risk of financial stability shock will grow exponentially.
According to the estimate, the Prime Minister, Rishi Sunak, might contest the next election amid declining output, increased unemployment, and increasing home foreclosures as mortgage payments continue to rise. The average interest rate on a two-year mortgage is currently about 6.25%, which is getting close to the levels that prevailed during the financial instability that led to the downfall of his predecessor, Liz Truss, last autumn.
The Bank of England may have to reinstate its recession call in August during its next forecasting round. Notably, this comes only three months after its biggest upgrade to growth projections since independence in 1997, saying that the real economy would be 2.25% larger by mid-2026 than it thought in February. However, economists predict that the economy will grow only 0.1% this year and drop 1% in 2024.
Hanson and Andrade also believe that the recent inflation strength and wage data leave the Bank of England with little choice but to squeeze the economy even more. They believe the bank will begin cutting rates in the second quarter of next year, but the inflation will still be above the target.
Bank of England hasn’t made a significant change
U.K. economists are worried that the regulators are overdoing it and need to step back from raising the interest rate. According to Andrew Goodwin, chief U.K. economist at Oxford Economics, the inflation in the country is in a new phase, with core inflation driven up by high pay growth instead of energy costs. He believes that the BOE will keep hiking the rates until there is evidence of wage increase and services inflation is lowering. However, he has warned that the results will hurt, citing a possible recession in 2024.
Another economist at The Institute of Economic Affairs, Julian Jessop, believes that the Bank of England is overdoing things to restore its lost credibility. He notes that the impact of rate hikes the Bank has done so far is yet to be felt.
Meanwhile, Duncan Lamont, head of the strategic research unit at fund manager Schroders, pointed out that hiking does not work as well as it used to in previous economies. He explained that the percentage of households owning their homes with no mortgage loan has increased over the last decade as young people look to get on the property ladder while older owners have fully or almost paid off all their home loans. Hence, Lamont says that higher rates make no difference to them, meaning that the Bank of England has to instil more monetary policy to impact the demand to see significant change.
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