- Derbeil Jordan & Daniel Thomas
- BBC news
The Bank of England warned on Thursday that Britain is facing its longest recession on record.
The institution raised interest rates this Thursday from 2.25% to 3%, the biggest increase since 1989and warned that the UK is facing landscape “very challenging” for the economy and unemployment will practically double by 2025.
The governor of the bank, Andrew Bailey, warned against a “a difficult road ahead” for households in the country, but said he must act decisively now or things “will be worse later”.
By raising rates, the bank is trying to reduce high inflation, which amounts to 10.1% per yearconsumer price growth rate not seen in the last 40 years, and wants to be around 2%.
Economic theory indicates that if interest rates are higher, asking for a bank loan becomes more expensive, which disincentivizes the taking of these loans and thus reduces price pressure on the higher demand side.
On the other hand, it encourages saving because investing money instead of spending it is better rewarded. This also reduces demand.
As in other countries, food and energy have become more expensive, partly because war in Ukraine.
A recession is defined as a decrease in economic activity in a country for two consecutive quarters.
Typically, during a recession, businesses make less money, wages fall, and unemployment rises. This means that the government receives less money from taxes for public services such as health and education.
Earlier, the Bank of England said it expected the UK to enter recession at the end of this year and that the economic phase would last throughout next year.
But he now believes the economy entered a “defiant” recession as early as last summer, which will continue next year and continue into the first half of 2024, a possible general election year.
While it will not be the deepest recession in its history, it will be the longest since records began in the 1920s, the central bank said.
The UK unemployment rate is at a 50-year low of 3.5% of the economically active population, but is expected to rise to almost 6.5%.
A controversial move
After learning of the central bank’s decision, Chancellor of the Exchequer Jeremy Hunt said “the most important thing the British government can do at this time is to restore stability, get our public finances in order and reduce debt so that interest rates keep it at rock bottom possible.
But the area’s shadow minister, Rachel Reeves, the peer appointed by the opposition to scrutinize the government, said families would not be able to cope with such steep rate rises. “We have rising food prices, rising energy bills and now higher mortgage rates,” he said.
The rate decision comes before the government announces its fiscal and spending plans under the new prime minister, Rishi SunakNovember 17.
This is the first monetary policy committee meeting since former prime minister Liz Truss and former finance minister Kwasi Kwarteng unveiled their controversial budget cuts in September.
His plans to cut 45 billion pounds ($50.45 billion) in taxes, much of which has already been reversed, sent the pound crashing and caused market turbulence, forcing the Bank of England to intervene to restore calm.
On Thursday, the pound fell 2% against the dollar and the price of government borrowing rose in response to the bank’s warnings.
Painful economic period
Analysis by Faisal Islam, BBC economics editor
The Bank of England has done something it doesn’t normally do in published minutes of its decisions: it has given guidance that appears to suggest a peak in interest rates of around 4.5 percentage points next autumn.
For those who see the glass as half full, that’s down from the 6% assumed just a month ago amid market turmoil following announced budget cuts.
While government borrowing costs and the level of the pound have recovered somewhat after a series of gyrations since then, mortgage and commercial loan markets are still showing some tension, adding to the long-term impact on the economy.
The forecast predicts that the unemployment rate will increase and household incomes will also decrease.
It is a picture of a painful economic period, with the UK underperforming the US or the Eurozone.
In fact, what was forecast as a sharp energy recession just three months ago is now a shallower but longer-lasting energy and mortgage shock.
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