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Warning UK economy to shrink as interest rates rise Featured

Warning UK economy to shrink as interest rates rise Warning UK economy to shrink as interest rates rise

The Bank of England has warned the UK economy will shrink this year as it raises interest rates to try to stem the pace of rising prices.

Rates rose to 1% from 0.75%, their highest level since 2009 and the fourth consecutive increase since December.

Inflation, at its highest for 30 years, is set to breach 10% by the end of the year, with fuel, energy and food costs soaring partly due to the Ukraine war.

As a result, people are reining in their spending which is hitting growth.

The Bank raised interest rates again to try to contain the rising cost of living.

Raising rates makes it more expensive for consumers and businesses to borrow. The idea is that people start spending less, helping cool demand for goods and services and, in turn, slowing the pace of price rises.

But economists have warned that increases in interest rates may have little effect given the rising global oil and gas prices.

The Bank's Monetary Policy Committee (MPC) - which sets rates - also acknowledged there were "risks" in rate rises, and said it would continue to review "incoming data".

The UK economy is now expected to contract by 0.25% in 2022, down from its previous forecast of 1.25% growth. While that would not technically be a recession - defined as two consecutive quarters of contraction - it would leave the UK at a real risk of one.

The MPC has also slashed its growth outlook for 2023 to 0.25%, down from 1%.

Governor of the Bank of England, Andrew Bailey, said the UK was set for "a very sharp slowdown" but declined to call it a recession.

He also defended raising rates at time when the cost of living is rising, saying that the risk of letting inflation get out of control was higher.

"We have been very careful in our response, taking into account the scale of the shock to the economy."

Interest rate rises

The Bank now expects inflation to hit 9% in the coming months - up from its previous forecast of 8% - and reach 10.25% by the end of the year.

It said the impact of the Ukraine war on household energy prices was largely to blame, following the increase in the energy price cap in April and a further expected increase in October which could push household bills up to £2,800 a year.

Consumers are also facing much higher prices for food, goods and services, it said.

As a result of the latest rise in interest rates, two million homeowners will see an immediate increase in their monthly mortgage repayments with other loans potentially getting more expensive too.

Bank policymakers said there had been "a material deterioration in the outlook" for world and UK economic growth owing to the war.

UK growth is expected to "slow sharply" as sharp rises in global energy and goods prices hit UK consumers and firms.

Analysis By Faisal Islam Ecenomics Editr BBC (source https://www.bbc.co.uk/news/business-61319867)

The cost of living issue is worsening and dragging the economy into recessionary territory, says the Bank of England.

It is forecasting two quarters of falls in the size of the British economy over the next year but not the technical definition of a recession because they are not consecutive.

The big picture, though, is of an economy now forecast to contract next year, at -0.25%, having previously been forecast to grow at 1.25% in February. Even that figure was the lowest in the G7.

Two factors are driving this. Firstly, a prediction that energy prices are going up by 40% in the autumn. And secondly, government spending policy, especially the removal of the significant "superdeduction" on corporation tax that has helped support businesses investment.

At the same time, at the end of this year, inflation is expected to go higher then 10%, a rate not seen since 1982.

Even before the Russia-Ukraine war, the economy was facing a perfect storm of supply problems, rising prices, and slowing growth.

The war has dragged all of these measures further in to the wrong direction.

The result is that interest rate decisions are especially unpredictable. The jobs market remains a bright spot for now. But more rate rises are on the way. How high they go will be tempered by an economy now going into reverse.

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Russia is one of the world's top oil and gas producers and its invasion of Ukraine has driven up global energy prices amid concerns about disruption to supplies. Russia and Ukraine are also major producers of commodities like metals, fertilisers and foodstuffs, the prices of which have also rocketed.

UK prices were already rising before the war due to the impact of the pandemic, and inflation hit 7% in the year to March - the highest for 30 years, and well above the Bank's 2% target.

The MPC said it expected inflation would peak this year before falling back to 3.5% in 2023 and to 1.5% by 2024. However, it said impact of consumers tightening their belts would be felt for much longer and was something "monetary policy is unable to prevent".

As the economy slows down, it expects unemployment to rise gradually from a low this year, to around 5% in 2024.

Its forecasts are based on market expectations that interest rates will rise as high as 2.5% in mid-2023 before falling back again.

source: https://www.bbc.co.uk/news/business-61319867


Read 62 times Last modified on Thursday, 05 May 2022 13:17
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