UK recession and inflation warning as interest rates rise and pound falls

Daily news Economy

UK interest rates have risen to 1% – their highest level for 13 years – with the Bank of England (BoE) warning the economy will slip into recession this year as experts predict inflation will go above 10%. The bank’s grim forecast hit the value of the pound which slumped to a two-year low, losing 2% against the dollar.

The BoE predicts the cost of living crisis, fuelled by soaring energy prices and Russia’s war in Ukraine, will see UK output contract 1% in the final quarter of 2022, with unemployment also expected to soar.

The dire economic forecast came as voters across the UK went to the polls for local elections with the BoE’s Monetary Policy Committee raising the key bank rate 0.25% to 1% – the highest it has been since February 2009. Today’s (May 5) rise is the fourth consecutive increase in the base interest rate, something not seen since 1997.

Inflation to surge above 10%

Three of the BoE’s nine Monetary Policy Committee (MPC) members voted for an even bigger half-point rate rise to try and combat soaring prices. The MPC said it was “unable to prevent” UK households becoming worse off and that its role is to get inflation back to its target 2% rate sustainably in the medium term.

BoE governor Andrew Bailey warned there will be a “very sharp slowdown” for the UK economy and said he understood the hurt that will be caused by higher energy prices and borrowing costs.

Inflation will surge above 10% in October – its highest rate since 1982 – when the second energy price cap rise this year kicks in, the BoE has warned. Energy prices are expected to rise around 40%. The BoE said it will take two years before inflation returns to its 2% target. Unemployment – currently at 3.6% – will reach 5.5% by 2025 as inflation kills the UK’s period of employment growth.

The BoE said October’s energy bills rise will likely push inflation to 10.2%, “the highest in 40 years and [will] slash real household incomes because wages would not keep pace.”

Financial markets anticipate UK interest rates could reach 2.5% next year, the Guardian reports.

House prices will continue to rise, predicts Savills

Even with the bleak economic forecast, Savills estate agents still expect house prices to rise with Lucian Cook, their head of residential research saying: “Despite some of the macro-economic pressures and today’s rate rise, it remains difficult to see the trigger for a meaningful house price correction, given the strength in the employment market and the fact interest rates remain low in a historical context.

“And given the mismatch between supply and demand we expect constrained stock to continue to drive further short-term price growth.”

Cook predicts that the economic climate is “likely to bring more caution over coming months” resulting in a progressive slowing of house price rises, “potentially to low single digit figures in coming years.”

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