According to sources, UK is experiencing a lengthy recession and the sharpest drop in living standards in 60 years.
Following a steep increase in interest rates and a prediction that inflation would reach 13% by the end of the year, Britain is now facing a prolonged recession and the biggest pressure on living standards in more than 60 years.
What is the bank rate?
The main interest rate in the UK is known as “Bank Rate.” Setting this interest rate is upour responsibility.
It is significant because it affects a wide range of other interest rates throughout the economy. This includes the interest rates on loans and savings that high street banks and building societies provide.
The current bank rate is 1.75 percent.
The Monetary Policy Committee of the Bank of England increased interest rates by 0.5 percentage points to 1.75 percent on Thursday, the largest increase in 27 years, by a vote of 8-1.
In response to skyrocketing inflation, the European Central Bank and US Federal Reserve took similar harsh actions as the Bank of England (BOE).
But according to its pessimistic predictions, Britain’s economic prospects are significantly worse than those of the US or the eurozone.
The UK economy has also been hurt by the impact of leaving the EU, and households there are more vulnerable to the energy price shock than those in the US and the eurozone.
The Bank predicted that the nation would enter a 15-month recession later this year, with a GDP decline of more than 2% from the peak to the trough.
According to Consensus Economics, which aggregates the predictions of top economists, the US will increase by 1.5% and the Eurozone by 1.7% in 2023.
The Bank of England (BOE) stated that it now anticipated inflation to rise above 13% at the end of the year, which is much higher than its May forecast.
The recent spike in gas prices, which was caused by Russia’s restriction of supplies, was cited as the reason. It would stay at “extremely elevated levels” throughout 2023 before reverting to the aim of 2% after two years.
“The war has an associated financial cost. But it won’t stop us from implementing monetary policy to bring inflation back to the target of 2%, said BoE governor Andrew Bailey following the ruling.
Even after accounting for the fiscal support the government promised in May, the Bank of England (BOE) predictions showed that consumers’ post-tax income would decline in real terms in 2022 and 2023.
” With statistics going back to the 1960s, a decrease in household income of more than 5% from peak to trough would be the worst ever recorded.
The Bank of England (BOE) anticipates a recession that will last longer and be more severe than it was in May.
According to the report, starting in the fourth quarter of 2022, the economy would contract for five straight quarters, causing a drop in GDP that was comparable to what was experienced in the early 1990s.
The Bank of England (BOE) predicted that even once a recovery started, growth would be “extremely feeble by historical standards.”
Following the decision, the value of the pound fell relative to the euro on concern that a protracted recession would constrain the size of future rate increases.
According to their predictions, inflation would likely remain in the double digits for at least the upcoming year but may drop below the objective of 2% by the end of 2024, even if the central bank made no further changes to its monetary policy.
The gloomy predictions sparked irate political recriminations. The Conservative leadership candidates, according to shadow chancellor Rachel Reeves, are
“touring the country proposing unworkable proposals that will do nothing to help people get through this crisis,” which is “more indication that the Conservatives have lost control of the economy.”
Foreign Secretary Liz Truss, who stated on Wednesday that she would seek to amend the BoE’s mandate if she were to become prime minister, is putting increasing pressure on it.
Her competitor for the Tory leadership, Rishi Sunak, a former chancellor, asserted that Truss would be unwise to increase borrowing and slash taxes at this time given the anticipated spike in inflation.
The bank has taken action, and any future governments must do their best to control inflation rather than make it worse, he said. Increased borrowing will push interest rates higher, which will result in higher mortgage payments for consumers.
According to Sunak’s experts, a 0.5 percentage point increase in interest rates would increase the Treasury’s debt servicing expenses by more than £6 billion.
Due to the succession of tax increases Sunak enacted while serving as chancellor, Truss has stated that Sunak is partially to blame for the recession that Britain is currently experiencing.