Monday, 4 July 2022 – 15:07

UK set to narrowly avoid recession as Bank of England raises interest rate to 1%

The Bank of England has announced its fourth consecutive 0.25% increase of interest rates, which now sits at 1%, the highest value since 2009.

Interest rates are increased in order to encourage consumers to save their money, as loans and mortgages become more expensive. The bank’s intention is that, by reducing the amount consumers are spending, the soaring costs of goods will not spiral out of control.

The announcement comes as the bank predicts inflation to exceed 10% by the end of the year, the highest inflation has been since 1982. The Bank of England sets the target value of inflation at 2%, but inflation is now not expected to return to that level until 2024.

Inflation had initially started to increase amidst pressures from the pandemic, along with inclement weather damaging energy infrastructure, and low wind-speeds in Europe leaving wind turbines inactive and increasing reliance on oil and gas.

These pressures were then heightened when Russia invaded Ukraine, leading to market uncertainty in oil and gas, of which Russia is a major exporter, driving up energy prices. Russia and Ukraine are also both major exporters of grain, causing the war and ensuing sanctions to drive up food prices.

The bank’s Monetary Policy Committee (MPC) also stated it expected unemployment to rise to 5% in 2024, and 5.5% in 2025.

The MPC has also predicted that the economy is expected to contract in the final quarter of 2022, and again in Autumn of 2023. This means the UK is only narrowly avoiding falling into a recession, which is defined as two consecutive quarters of negative GDP growth.

Investors and businesses now appear to expect interest rates to rise to 2.5% in mid-2023 before starting to fall again, although some economists have expressed doubts that it will be raised this high. Three of the nine MPC members voted to instead increase interest rates by 0.5%, and it is likely that interest rates will be increased again several times. The MPC, in its characteristically non-committal manner, stated “some degree of further tightening of monetary policy may still be appropriate in the coming months.”

The MPC also warned that household disposable income is set to continue to fall due to rising energy prices, with the average annual energy bill expected to hit £2,800 in October 2022.

Many people will be nervously eyeing Russian policy regarding its gas exports, as if it chooses to halt sales to more European countries, as it already has done to Poland and Bulgaria, energy bills will skyrocket even further as countries are forced to rely on their oil and gas reserves.

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