Bank Of England Predicts UK Will Dodge Technical Recession With Inflation To Fall Sharply

But, the Bank has just raised interest rates again, following a surprise increase in inflation last month.
Governor of the Bank of England, Andrew Bailey
Governor of the Bank of England, Andrew Bailey
POOL via Reuters

The Bank of England has just predicted that the UK will not fall into a technical recession later this year, as it previously suggested.

But, it has also just announced it will raise interest rates again, this time to go up to 4.25% – and that’s quite a big deal.

Here’s what you need to know.

What is a technical recession?

A recession is known as negative growth for two consecutive quarters (six months in a row).

The Bank of England previously predicted that the UK would face a shallow but long recession.

Last August, governor Andrew Bailey suggested it could last as long as the 2008 financial crisis, which was five quarters, but not cause as much damage.

By February, the Bank said it would be a shorter recession with the economy shrinking by 0.4% – but still thought there was one on the horizon.

So, why might we avoid a recession now?

After months of the UK seemingly teetering on the very edge of recession (with just flat, rather than negative, growth), the Bank now thinks we will dodge it altogether.

In fact it expects the economy to grow “slightly” in the coming months rather than shrinking – with inflation surprisingly turning “negative” by the end of this year.

The Office for Budget Responsibility, the government’s official forecaster, said the same thing last week.

It all comes down to Jeremy Hunt’s Budget last week and lower energy costs which should make inflation fall.

Why is this interest rate increase important?

UK interest rates
UK interest rates
PA Graphics via PA Graphics/Press Association Images

The Bank’s Monetary Policy Committee has lifted the Bank Rate (the interest rate which influences other banks) by 0.25%, taking its total rate to 4.25%.

It comes after the inflation rate in February unexpectedly jumped for the first time in months to 10.4%, up from 10.1% in January.

This inflation increase came after the salad and vegetable shortages experienced earlier this year.

That’s the 11th time the Bank has increased the Bank Rate in a row.

It’s also the highest rate the UK has had since October 2008 in the early days of the financial crash when the Bank Rate was 4.5%.

This increase is set to hit anyone looking to take out a mortgage, meaning it will have an impact on the property market, and may prove costly to banks as fewer people take out loans.

But the Bank said it would only go further than the current 4.25% rate if there’s “evidence” of further inflationary pressure.

What impact do interest rates have on inflation rates?

When interest rates increase, it means the cost of borrowing goes up with mortgages and other loans.

People then spend less, and there’s less money circulating in the economy – so prices tend to come down in response.

As inflation is the rate at which products and services increase over a given time period (usually a year) has been creeping up, causing a cost of living crisis, the Bank is keen to bring it back down.

And interest rates are the organisation’s lever to do so.

Chancellor Jeremy Hunt said that he welcomed the Bank’s increase.

He said: “With rising prices strangling growth and eroding family budgets, the sooner we grip inflation, the better for everyone.

“That’s why we support the Bank of England’s actions today and why we will continue to play our part in this fight by being responsible with the public finances, alongside providing cost of living support worth an average of £3,300 per household over this year and next.”

What next?

The Bank will next review its interest rates in May.

But, as the BBC’s economics editor Faisal Islam noted, today’s news could be the last interest rate hike. He explained: “The pace of rises is slowing, from half a percentage point previously.”

However, the global financial sector is especially turbulent right now, as seen in the collapse of the Swiss bank Credit Suisse.

Still, the UK seems resilient with consumers coping even after the shocking energy price rises, and unemployment is not expected to rise.

The pound also strengthened immediately after the interest rate rise – it’s trading 0.5% higher against US currency at $1.22 and is up against the euro by 0.25% to €1.132.

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