After raising the cost of borrowing to 3% in the biggest single interest rate increase since 1989, the Bank of England warned that England could fall into the longest recession in 100 years.
The Bank said that a 0.75 percent interest rate hike, the latest in a series of eight rate hikes since last year, would not be enough to win the war against double-digit inflation and that more action would be needed.
The outlook for the England economy is “very difficult,” and the recession that started this summer is now expected to last until the middle of 2024.
If there is a general election in 2024, the Conservatives will have to campaign to stay in power at the end of a long recession, when the Bank said unemployment was likely to rise from 3.5% to 6.5%.
But mortgage holders got some relief when the central bank played down City expectations of a sharp rise in the cost of borrowing to above 5%. It did this by saying that the possibility of a two-year recession meant that it was likely to take a much less aggressive stance.
The governor of the Bank, Andrew Bailey, was quoted as saying, “We can’t make promises about future interest rates, but based on where we are today, we think the bank rate will have to increase to go up by less than what is currently priced in financial markets.”
Bailey and his staff think inflation will drop to zero by 2025, and analysts at Berenberg Bank think rates will only go up one more time, to 3.5 percent.
Bailey said that households were already being hurt by higher interest rates on loans.
At a press conference after the Bank’s quarterly monetary policy report came out, he said, “These are big changes that will have a real effect on people’s lives.”
Homebuyers with tracker or variable rate mortgages will feel the rate increase right away, while the estimated 300,000 people who need to remortgage this month will find that two-year and five-year fixed rates are still at levels not seen since the 2008 financial crisis.
The Bank said that fixed-rate mortgage costs were already lower than they were at the height of the panic that followed Kwasi Kwarteng’s poorly received mini-budget, which sent them soaring above 6%.
Bailey said that he hoped home loan providers would continue to cut the prices of their products for homebuyers as a response to the Bank’s worry about the housing market.
Bailey said he understood that higher interest rates hurt, but he added, “If we don’t act forcefully now, it will be worse in the future.”
It said that higher energy prices and a tight job market were to blame for the big rise, which was similar to the big rises made by the US Federal Reserve and the European Central Bank in the last week.
In 1989, rates in England went up by more than 0.5%. During the exchange rate mechanism crisis in 1992, which lasted less than 24 hours, John Major’s government was forced to raise taxes by 2%.
The nine people on the monetary policy committee (MPC) were split 7-2 on whether or not to raise rates. Swati Dhingra favored a 0.5 percent hike, while Silvana Tenreyro favored an increase of 0.25%. The London School of Economics is where they both teach. They said that the full effects of eight straight increases should be seen in the economy as a whole before harsher steps are taken.
The Chancellor, Jeremy Hunt, has said that inflation is a major threat. It hurts families, pensioners, and businesses all over the country.” Because of this, this government’s top priority is to get inflation under control. Today, the Bank took action to help them reach their goal of getting inflation back to where they want it to be.
“After months of economic instability, families now have to deal with higher mortgages and greater worry,” Rachel Reeves, the shadow chancellor, said. “After months of economic ruin, families now have to deal with.”
People who work are paying for the failure of the Conservatives. Britain should have better than this.”
If rates stayed the same at 3%, the economy would still shrink until the end of 2023, but the total drop in output would be only 1.7% instead of 2.9%, and the highest rate of unemployment would be just above 5%.
The Bank said that it had not taken into account anything that Hunt might do in his Autumn Statement on November 17. However, the chancellor is expected to announce a package of tax increases and spending cuts worth up to £50bn.
An England analyst at Berenberg named Kallum Pickering said, “A lot will depend on the upcoming [budget] announcement, but today’s policy decision and guidance support our prediction that the Bank will only raise the bank rate by 0.5 points in December, bringing it to a peak of 3.5%.”
They continued by saying that after this “we expect the Bank will do nothing during the first half of 2023 and then decrease the bank rate by roughly 0.5 points in the second half.” After this, “we believe there will be no action taken by the Bank in the first half of 2024.”
There is a slight chance that there will be another 0.25-point hike in February.
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