Britain Into 2-Year Recession?

On November 3rd, The Bank of England (Boe) announced its biggest interest rate increase since 1989. This was to combat inflation. The BoE lifted borrowing costs by 0.75 percentage points to 3% – the highest level since the 2008 global financial crisis.  This was to cool inflation of near 11%. The latest rate increase mirrors aggressive tightening by central banks worldwide as food prices and energy bills soar.

The BoE said British inflation would peak at 10.9% in 2022. Some analysts believe the central bank rate could still hit around 5% in the coming months. Such a rate, could see the UK economy suffer eight quarters of contraction in a row. 

The BoE said the economy had shrunk since the third quarter, entering a technical recession that is forecast to last until the first half of 2024. The Bo's forecasts are especially hard to piece together given the government is unclear on its fiscal strategy. More details are due on November 17.

The Bank was forced to intervene in financial markets in September, launching an emergency bond-buying operation after then-prime minister Liz Truss' controversial mini-budget sparked economic chaos.

With recently installed Prime Minister Rishi Sunak now in office, and Finance Minister Jeremy Hunt having walked back most of his predecessor's proposed tax cuts, fiscal and monetary policy no longer seem to be pulling in opposite directions.

The pound tumbled 2% against the dollar on expectations of a long-lasting recession and BoE expectations that its key rate may not rise much further.

London's FTSE 100 shares index fared better, rising about half-a-percent. However the second-tier FTSE 250, which is less internationally-focused, retreated.

The BoE rate increase is set to worsen a cost-of-living crisis for millions of with retail lenders pushing up interest rates.

As the Covid-19 pandemic began in early 2020, the BoE slashed its key interest rate to a record-low 0.1% and also pumped massive sums of new cash into the economy. It started raising rates last December, while the November 3rd increase was the eighth increase in a row.

For Rishi Sunak, this is the moment. He has to navigate inflation and cost of living first, then set growth policies to reverse the downturn. If he doesn’t succeed then Labour wins the next election.

References:

UK faces longest recession since records began, Bank of England says, Karen Gilchrist, CNBC, Nov 3, 2022

Bank of England warns UK may face 2-year recession, raises rate, The Sunday Daily, Nov 4, 2022