Barely ten days after the UK got its new PM Rishi Sunak, the country's central bank has brought a worrisome news for its economy. Britain is headed for a deep?recession, with the Bank of England (BOE) working to bring down inflation in a move that may cost the UK economy at least half a million jobs, i.e. 5 lakh jobs.
The?IMF?and?World Bank?have already warned about global recession in coming months.??
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The UK central bank pushed through its biggest interest rate increase in 33 years yesterday, bringing the benchmark lending rate to a 14-year high of 3%. It estimated unemployment may rise to just above 5% even if borrowing costs remain steady and the economy may shrink 1.7% over 18 months, and not recovering for three years, as per Bloomberg report.
The UK is expected to be hit with the longest recession since records began, with the economic downturn likely to extend well into the year 2024.??
BOE also tweeted about its governor explaining the rationale behind the rate hike decision yesterday.
The outlook underscores the headwinds Rishi Sunak¡¯s government faces in the runup to the next election, with the Treasury planning a package of spending cuts and tax increases on November 17. While economists are relieved the BOE and Treasury appear to be working together again after an ill-fated stimulus package abruptly ended Liz Truss¡¯s term as prime minister, the result will be bitter medicine for people in the UK.
The BOE¡¯s move is another sign that Britain is moving further away from the US economically, with the prospect of a soft landing receding. BOE Governor Andrew Bailey struck a dovish note, warning that markets were pricing in too many rate rises for the UK. That marked a sharp contrast with Federal Reserve Chair Jerome Powell, who said Wednesday that US rates will probably go higher than people are thinking.
BOE governor Bailey has to strike a difficult balance. With inflation at a 40-year high of 10.1%, i.e. five times the BOE¡¯s target, policy makers are reportedly signaling rates will have to rise further to prevent a wage-price spiral. But by pushing back on bets investors have made for rates to peak above 5%, he may help the Treasury stabilize the public finances.
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¡°The Fed was saying that markets were under-pricing the terminal rate,¡± said Charles Hepworth, investment director at GAM Investments as per Bloomberg report.. ¡°The bank went in the opposite direction and said markets are over-pricing the terminal rate. This is entirely down to the fact that the UK economy is in a much weaker position than the US.¡±
Chancellor of the Exchequer Jeremy Hunt is seeking to fill a ?50 billion gap in the government¡¯s budget, and lower interest payments on the government¡¯s burgeoning debt would make a big impact. Every 1 percentage point fall in short-term interest rate projections spares the government about ?10 billion.
BOE governor Bailey said homeowners should see an easing in mortgage rates after recent spikes that threatened to add ?3,000 a year to the cost of the average home loan.
For Andy Burgess, fixed income investment specialist at Insight Investment, the BOE¡¯s stance signaled a welcome return to the period before Truss¡¯s disruptive 44 days as prime minister. In her tenure, she set fiscal and monetary policy against one another -- with one foot on the brake and the other on the accelerator, as the International Monetary Fund put it. The reverse is now happening, Burgess said.
"An important caveat to the MPC¡¯s projections is that they don¡¯t include the looming fiscal consolidation that is set to be announced by the government on Nov. 17. The scale, timing and, to a lesser extent, composition of that package of spending cuts and tax rises could have a material impact on how far the MPC lifts rates. All else being equal, tighter fiscal policy requires a looser stance from monetary policy", says?Dan Hanson and Ana Andrade, Bloomberg Economics.?
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As per BBC report, 58 year old Michelle, from East Riding in Yorkshire, has a loan on a van and is nervous about rising interest rates.?"My disposable income has gone down dramatically recently and I earn more than the amount to get benefits," she told the BBC. "They need to help the middle earners."
She needs the van to get to work as there's no public transport near her. But if her loan repayment costs rise she fears about having to give up the vehicle.?
"I can work from home, but like most places my place of work wants us back in the office at least three days a week and I've had to have talks with them about how I can afford that.?"It's a 60-mile round trip, it's expensive."
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