The UK has a 50-50 chance of being in recession with interest rates still high when the general election is called next year, the Bank of England has said.
Governor Andrew Bailey announced the Bank’s key base rate will be unchanged at 5.25% for the second consecutive month but added: “It’s much too early to be thinking about rate cuts.”
That means significantly higher borrowing costs for the 630,000 homeowners remortgaging between now and May, the Labour party said, describing the impact as a “financial timebomb”.
The Bank of England raised interest rates for 14 consecutive months to September to combat the UK’s soaring inflation, despite rising fears it could lead to recession. It believes higher borrowing costs and the resulting squeeze on household budgets has worked with inflation expected to fall further in the following months.
The governor said: “Higher interest rates are working and inflation is falling. But we need to see inflation continuing to fall all the way to our 2% target. We’ve held rates unchanged this month but we will be watching closely to see if further rate increases are needed.”
Energy and other costs would be impacted if the deepening Israel-Gaza conflict escalates across the Middle East, and Bailey said: “It is a risk, clearly, that any sort of wider disturbance in the Middle East can obviously threaten energy prices, both oil and gas, and we watch that very carefully. So yes, we do see that as a risk going forwards.”
Inflation remained at 6.7% in September and with energy and food price pressures easing, it is predicted to fall to 3% and remain there throughout 2024. That will meet one of prime minister Rishi Sunak’s five promises to voters, but high interest rates will impact negatively on UK economic growth.
The Bank has given a 50-50 chance of a recession by the middle of next year with its forecast of a year of zero-growth for the UK economy if interest rates follow the trajectory expected by the financial markets.
Analysis of figures from the Office for National Statistics (ONS) by the Labour party is warning a “financial timebomb” affecting 630,000 homeowners will be set off by before next year’s local and general elections, caused by higher borrowing rates.
Labour said some 3,400 households will remortgage every day in the six months between November 2 and May 1 2024 and face paying an extra £220 in interest every month.
Shadow chancellor Rachel Reeves said: “It was the Conservatives’ disastrous mini-budget last year that crashed the economy, sent mortgage rates soaring and made the dream of homeownership a nightmare for hard-pressed families.”
This week, HSBC – Europe’s biggest bank – credited higher interest for a 240% lift to its quarterly profits resulting in a huge windfall for shareholders. The London based bank recorded pre-tax profits of £6.4 billion for the three months from July to September.