UK Will Fall Into Recession This Year, Warns Bank Of England After Highest Ever Rate Hike In 27 Years

Last month, Japanese Financial Firm Nomura had included UK in its list of major economies which could enter a recession in the next 12 months. The list had other big names such as Japan, South Korea, Australia and Canada. Around that time earlier last month, even the IMF Chief had agreed that the possibility of global recession next year cannot be ruled out.

And now, the Bank of England has warned that the UK will fall into recession this year, after the biggest interest rate hike in 27 years, i.e. since 1995.

The bank¡¯s MPC (monetary policy committee) now projects that the U.K. will enter recession from the fourth quarter of 2022, and that the recession will last for five quarters as real household post-tax income falls sharply in 2022 and 2023 and consumption begins to contract.

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The economy is forecast to shrink in the last three months of this year and keep shrinking until the end of 2023. Interest rates in the UK rose to 1.75% as the Bank of England battles to stem soaring prices, with inflation now set to hit over 13%, as per a BBC report.

Governor Andrew Bailey reportedly said he knew the cost of living squeeze was difficult but if it didn't raise interest rates it would get "even worse".

The main reason for high inflation and low growth is soaring energy bills, driven by Russia's invasion of Ukraine. A typical household will be paying almost ?300 a month for their energy by October, the Bank warned.

The expected recession would be the longest downturn since 2008, when the UK banking system faced collapse, bringing lending to a halt, the BBC report mentioned.

"Sympathy For Those Struggling The Most"

The Bank's governor Andrew Bailey also said he had "huge sympathy and huge understanding for those who are struggling most" with the cost of living.

"I know that they will feel, 'Well, why have you raised interest rates today, doesn't that make it worse from that perspective in terms of consumption?', I'm afraid my answer to that is, it doesn't because I'm afraid the alternative is even worse in terms of persistent inflation."

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Increasing interest rates is one way to try and control inflation as it raises borrowing costs and should encourage people to borrow and spend less. It can also encourage people to save more.

However, many households will be squeezed further following the interest rate rise including some mortgage-holders.

Now rates have gone up to 1.75%, homeowners on a typical tracker mortgage will have to pay about ?52 more a month. Those on standard variable rate mortgages will see a ?59 increase.

It means tracker mortgage holders could be paying about ?167 more a month compared to pre-December 2021, with variable mortgage holders paying up to ?132 more. Interest rates have risen six times in a row since the end of last year. Higher interest rates also mean higher charges on things like credit cards, bank loans and car loans.

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The Bank of England has reportedly warned that the UK economic growth was already slowing, adding: "The latest rise in gas prices has led to another significant deterioration in the outlook for the UK and the rest of Europe".

The rate of inflation is expected to stay at "very elevated levels" throughout much of next year, the Bank said. It will eventually return to the Bank's 2% target the following year.

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