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Bank of England Raises Interest Rates, Heightening Fears of UK Recession

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Bank of England Raises Interest Rates, Heightening Fears of UK Recession

(CTN News) – Fears that the British economy is heading for a recession have intensified following the Bank of England‘s unexpected decision to raise borrowing costs more than anticipated.

The move aims to tackle persistently high inflation, but it is expected to significantly impact borrowers, especially homeowners who need to refinance in the coming months.

Bank of England’s Surprise Rate Hike Raises Concerns

The Bank of England’s Monetary Policy Committee, comprising nine members, announced a half-percentage-point increase, bringing the main interest rate to a 15-year high of 5 percent.

This 13th consecutive rate hike surprised economists, as most had predicted a smaller quarter-point increase. Some analysts even considered it a panic move, given the recent expectations of a pause in the rate-hiking cycle.

Financial markets now anticipate a potential rate peak of 6 percent, a level not seen since early 2000. Governor Andrew Bailey warned of further increases if inflation fails to show signs of slowing down, emphasizing the bank’s commitment to achieving the 2 percent inflation target.

The Bank of England’s decision was driven by concerns over inflation, which has proved more persistent in the UK than in other major economies. Many attributes this to the bank’s slow start in raising borrowing rates and the impact of Brexit, which has added to import costs.

With wages rising rapidly, it is becoming increasingly clear that high inflation has become entrenched in the UK economy. Governor Bailey acknowledged the difficulties faced by those with mortgages and loans but emphasized that delaying rate hikes could lead to worse consequences.

Thursday also witnessed other European central banks raising borrowing costs, including the Swiss National Bank with a quarter-point hike and Norway with a half-point increase. Turkey nearly doubled its benchmark rate, signaling a shift from unconventional economic policies.

Central banks worldwide, from the US Federal Reserve to the European Central Bank, have raised interest rates rapidly in recent years to curb inflation driven by supply chain disruptions and surging energy and food costs resulting from Russia’s invasion of Ukraine.

Growing Concerns over the British Economy and Potential Recession

While higher interest rates help reduce inflation by increasing the cost of borrowing for individuals and businesses, leading to potentially lower demand and price pressures, they also pressure borrowers.

In the UK, the rate hike will particularly impact the 1.4 million households expected to refinance their mortgages this year. Variable mortgage holders, whose rates track the bank’s base rate, will experience an immediate increase in their repayments. Renters will also face higher costs.

Economists, such as Max Mosley from the National Institute for Economic and Social Research, warn that the interest rate hike to 5 percent could push millions of households with mortgages to the brink of insolvency.

Concerns are mounting regarding the British economy, which has managed to avoid recession while Europe’s economy contracted slightly in the first half of the year.

Economist Luke Bartholomew from asset management firm Abrdn suggests that a recession may be inevitable in the UK as part of curbing inflation. He considers the large rate increase as a significant milestone toward that recession.

A recession would potentially lead to an increase in unemployment and home repossessions. This unfavorable backdrop is a cause for concern for the Conservative government, which is already trailing behind the main opposition Labour Party in the polls, especially with a general election looming.

Prime Minister Rishi Sunak Attempts to Reassure the Public Amid Economic Concerns

In response to the mounting economic concerns, Prime Minister Rishi Sunak, who has made reducing inflation to around 5 percent his primary objective for this year, attempted to reassure the public.

He acknowledged the anxiety felt by many and expressed his full commitment to addressing the situation, assuring people that they will get through this challenging period.

However, not everyone is convinced that the Bank of England’s decision is right. Critics argue that previous interest rate hikes have not fully impacted the economy due to the time lag.

They caution that driving interest rates so high that the economy plunges into a recession will only exacerbate the current crisis, resulting in job losses and home foreclosures.

Paul Nowak, the general secretary of the Trades Union Congress, voiced these concerns, emphasizing the potential detrimental effects on individuals and the economy as a whole.

The Bank of England’s unexpected interest rate increase also coincided with similar actions by other European central banks. The Swiss National Bank raised rates by a quarter-point, while Norway implemented a half-point increase. Additionally, Turkey nearly doubled its benchmark rate, signaling a departure from unorthodox economic policies.

Central banks worldwide have been diligently raising interest rates over the past few years to combat inflation caused by supply chain disruptions and the surge in energy and food costs resulting from geopolitical events such as Russia’s invasion of Ukraine. The US Federal Reserve recently decided to keep rates unchanged but hinted at the possibility of further hikes later in the year.

These rate hikes aim to curb inflation by making borrowing more expensive, reducing spending and easing pressure on prices. However, the immediate consequence is increased financial pressure on borrowers and homeowners.

Arsi Mughal is a staff writer at CTN News, delivering insightful and engaging content on a wide range of topics. With a knack for clear and concise writing, he crafts articles that resonate with readers. Arsi's pieces are well-researched, informative, and presented in a straightforward manner, making complex subjects accessible to a broad audience. His writing style strikes the perfect balance between professionalism and casual approachability, ensuring an enjoyable reading experience.

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