UK recession warning as rates rise

Business groups reacted with grim resignation on Thursday as the Bank of England raised the base interest rate by half a percentage point to 1.75%, representing the biggest rise in 27 years and the highest rate in the UK since 2008.

uk recession
The rise itself was not surprising given the global inflationary spiral, but what bothered economists more was the Bank's prediction that the UK could fall into recession by the end of the year and then stay there throughout 2023.

The Bank's Monetary Policy Committee (MPC) also warned that inflation could top 13% later in the year and not return to its 2% target until 2024.

"Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly...that largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs," said the MPC.

"As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023."

The Bank of England's decision followed the announcement by the US Federal Reserve last week that America's key interest rate was to increase by three-quarters of a percentage point to a range of between 2.25-2.5%.

Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said the Bank of England’s decision followed in the footsteps of tightening by other central banks, all of which "underscores the seriousness of our inflation problem, but also demonstrates the MPC’s willingness to act in response".

“Monetary policy is the first line of defence against inflation, yet building resilience to future price shocks requires a concrete plan for economic growth.

"So the new prime minister must prioritise boosting productivity through greater business investment via incentives and business rate reforms. Meanwhile, investing in energy efficiency can support people struggling with the cost-of-living crisis."

David Bharier, head of research at the British Chambers of Commerce (BCC), said the increase in the UK rate was "the clearest signal yet" of the Bank's determination to get inflation under control.

"Spiralling prices are cited by businesses as by far and away the top concern right now," he said. “However, given the extremely precarious state of the economy, this decision is not without risk for businesses and consumers that are exposed to banking or overdraft facilities.

“There are many causes of the current inflation crisis - global supply chain problems, trade barriers, soaring energy costs, increased taxes, and labour market shortages. Interest rate rises alone will do little to address these."

Mr Bharier said that research by the BCC indicated that most SMEs were not investing for growth and that "longer-term confidence is beginning to wane".

Matthew Ryan, head of market strategy at global financial services firm Ebury, pointed to sterling's drop in value in the immediate aftermath of the rates rise: "Of particular concern is the Bank’s appraisal on the impact of the cost of living crisis on economic activity," he said.

"Policymakers now expect the UK economy to contract throughout all of 2023, with a peak-to-trough fall of more than 2%. This is a far sharper downturn than market participants had accounted for, hence the initial knee-jerk sell-off in the pound."

Hussain Mehdi, macro and investment strategist at HSBC Asset Management, added: "Today's decision confirms the notion of a central bank determined to crush inflation in the face of ongoing supply-side challenges, including a very tight labour market and soaring energy bills."
Related Articles:More get jobs but vacancies rise, tooUK economy 'rebounds' to unexpected growthHousing market surprises with another record

Read more news and views from David Sapsted, July articles. Subscribe now to Think Global People magazine and read more from David on free trade agreements and their implications for business, international managers and global mobility

Subscribe to Relocate Extra, our monthly newsletter, to get all the latest international assignments and global mobility news.Relocate’s new Global Mobility Toolkit provides free information, practical advice and support for HR, global mobility managers and global teams operating overseas.Global Mobility Toolkit download factsheets resource centreAccess hundreds of global services and suppliers in our Online Directory 

Related Articles