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The Bank of England (BoE) has raised interest rates to 1 per cent—a 13-year high—in a bid to tackle inflation. With inflation at its highest level in 30 years, households are having to rein in spending, affecting economic growth. As such, Britain’s economy could plunge into a recession before the end of the year, warns the BoE.
Inflation Growth
Inflation continues to grow in the UK. Prices rose 7 per cent in Britain in March compared to a year earlier, the fastest pace since 1992. And costs are set to increase further, with the BoE predicting inflation will peak above 10 per cent in the last quarter of this year.
The inflation shock has been made worse by the impact on supply chains from COVID-19 lockdowns in China and the rise in energy costs since the Russian invasion of Ukraine. Consequently, households are set to suffer the second biggest squeeze on their incomes since records began in 1964, according to the BoE.
Recession Risk
According to financial experts, the UK is at risk of falling into recession. And although a technical recession—two quarters of negative quarter-on-quarter gross domestic product growth—may be avoided, a downturn is expected nonetheless. The BoE’s previous estimate of 1.25 per cent economic growth in 2023 has been cut, now showing an expected contraction of 0.25 per cent.
Implications for Consumer.
The increased interest rate of 1 per cent is designed to help control rising inflation. The subsequent increased cost of borrowing encourages people to borrow less, spend less and save more.
However, for many, the additional expense of borrowing will only worsen their finances, which have been stretched by rising energy costs. In fact, 4 in 10 bill-payers have been finding it difficult to afford their energy bills, according to the Office for National Statistics.
Implications for Businesses
With evidence that the economy is already slowing down, consumer confidence is dropping. Consequently, businesses are worried price increases will depress consumer spending.
Additionally, the increased interest rate will mean higher payments when borrowing from the bank, so commercial mortgages and loans may rise. As a result, businesses will likely need to raise prices to cover costs.
Conclusion
The BoE meets every six weeks to set and decide monetary policy, with the next meeting on the 16th June 2022. Since December, the BoE has raised interest rates at every policy meeting.
In the meantime, employers should be cognizant of workers’ financial struggles. In addition, employers and business leaders should consider ways to reduce their own expenses to navigate the tricky economic climate. For more information, contact us today.
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