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UK risks its SECOND recession in three years as post-Covid era bites: Brace for a bleak Christmas, warns the BofE as it says inflation will top 10% while growth falls at the end of the year… and raises interest rates AGAIN

  • The Bank of England has raised interest rates to a 13-year high of 1 per cent warning of inflationary threat
  • The Bank warned that headline inflation rate is set to top 10 per cent this year and economy is stalling  
  • First forecast since the Ukraine war began highlights fears of lower growth and pain for years to come   

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The Bank of England today warned families to brace for a bleak Christmas with the cost-of-living crisis set to reach an agonising climax at the end of this year – and potentially drag the country into recession for the second time in barely three years.

Governor Andrew Bailey laid out the storm clouds that are gathering over the UK, with CPI inflation now expected to peak at 10 per cent – the highest level since 1982 – in the last quarter when the energy cap soars again.

In a brutal hit on families, GDP is projected to plunge by around 0.9 per cent over those three months – and will be in the red through 2023 as a whole, declining by 0.25 per cent. 

The Bank suggested the country will avoid a technical recession – defined as two consecutive quarters of falling activity – but experts warned the risk is ‘intensifying’. UK plc has barely clawed back the ground from the Covid-triggered downturn in 2020, which was the biggest in a century. 

In a desperate bid to control rampant inflation, the Bank has pushed up interest rates once more despite the danger of choking what little growth is left. The latest 0.25 percentage point hike takes them to a 13-year high of 1 per cent and will add to the mortgage burden for many Britons already struggling to cope with the cost-of-living crisis. It is the fourth increase the Monetary Policy Committee has ordered since December.   

The Bank admitted that the balance of risk on inflation is still that it could be even higher than anticipated, with the shock bigger than the oil crisis of the 1970s but lasting less time.

At a press conference, Mr Bailey warned that the Ukraine war had ‘sharply intensified’ inflationary pressures. He said the 1.75 per cent squeeze on incomes this year would be the worst on record apart from 2011 and he ‘recognised the hardship that this will cause for many in the UK’. 

‘The biggest driver is the real income shock which is coming from the change in the terms of trade, particularly from energy prices, and from some core goods and some food,’ he said. 

Boris Johnson – who is facing crucial local elections today – has admitted that Britain is in a ‘tough patch’ but said the country is in a ‘much better position’ to cope with rising inflation than it was in the 1980s or 1990s.

The value of the pound slipped near two-year lows at 1.24 against the US dollar and 0.6 per cent to 1.178 against the euro after the Bank’s gloomy views emerged.

The economy essentially flatlines over the next three years, under the latest projection from the Bank of England

The economy essentially flatlines over the next three years, under the latest projection from the Bank of England

Unemployment is now anticipated to reach 5.5 per cent by 2025 as the economy runs into trouble

Unemployment is now anticipated to reach 5.5 per cent by 2025 as the economy runs into trouble

The darkening picture for the UK includes CPI inflation reaching double-digits- the highest level since 1982

The darkening picture for the UK includes CPI inflation reaching double-digits- the highest level since 1982

Governor Andrew Bailey gave a gloomy update as he insisted that the Bank is ready to take action to tackle inflation

Governor Andrew Bailey gave a gloomy update as he insisted that the Bank is ready to take action to tackle inflation  

Inflation and interest rates both spiked in the 1970s - but Professor David Blanchflower said the UK faced a different situation today

 Inflation and interest rates both spiked in the 1970s – but Professor David Blanchflower said the UK faced a different situation today

The OBR highlighted in March that Britons are facing the biggest fall in real disposable income on record this year

The OBR highlighted in March that Britons are facing the biggest fall in real disposable income on record this year

Prime Minister Boris Johnson, pictured, yesterday in Southampton dismissed calls for the imposition of a windfall tax on big energy companies to help solve the UK's cost of living crisis

Prime Minister Boris Johnson, pictured, yesterday in Southampton dismissed calls for the imposition of a windfall tax on big energy companies to help solve the UK’s cost of living crisis

How inflation threatens families and the public finances 

Inflation has long been seen as one of the biggest threats to economies.

In extreme examples, it has spiralled out of control and sparked panic.

The German Weimar Republic effectively collapsed after the value of the mark went from around 90 marks to the US dollar in 1921 to 7,400 marks to the dollar in 1921.

In Zimbabwe between 2008 and 2009 the monthly inflation rate was estimated to have reached a mind-boggling 79.6billion per cent.

Although inflation has faded in the minds of Britons who have become used to ultra-low interest rates and stable prices, it caused chaos here in the 1970s.

Deregulation of the mortgage market, the emergence of credit cards and an overheating economy drove the rate to an eye-watering 25 per cent in 1975.

People would rush to buy goods with their wages after pay-day, as the costs were rising so quickly.

Strikes erupted as there was pressure for pay packets to keep pace with prices.

Unemployment rose as the economy tipped into recession, and the government had to pump up interest rates in a bid to bolster the pound and control the surge.

That meant mortgage interest payments spiked into double digits.

And as a result servicing the national debt became a serious problem. 

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The Bank’s main remit is to control inflation, but there are doubts over how effective a rate cut can be when the pressures are largely global and the UK economy already appears to be slowing down dramatically.

In a grim set of forecasts, it predicted growth will contract in the final three months of 2022 as the cost squeeze sees households rein in their spending.

The UK is set to narrowly miss a technical recession, as defined by two quarters in a row of falling GDP, but the Bank expects very weak quarterly growth in 2023 and a contraction as a whole next year – with GDP down 0.25 per cent and unemployment picking up sharply as cost pressures hit hard.

The prediction for growth in 2022 remains unchanged at 3.75 per cent, although the Bank also slashed its growth outlook for 2024 to 0.25 per cent from the 1 per cent it predicted in February.

Sky-high inflation will see household disposable income plunge by 1.75 per cent this year – the second highest on record – while overall real income will tumble by an unprecedented 3.25 per cent this year and fall again in 2023 before beginning to recover, the Bank cautioned.

Despite the stalling economy, three MPC members – Catherine Mann, Jonathan Haskel and Michael Saunders – backed a bigger rate rise to 1.25 per cent. 

Allies of Rishi Sunak believe his insistence on holding back some of the boon from higher tax revenues in his Spring Statement has been vindicated by the dire Bank forecasts. 

He will now be under massive pressure to come forward with more help for Britons unable to make ends meet.  

However, Northern Ireland Secretary Brandon Lewis insisted last night that there will be no more support announced before the Autumn Budget.

Financial markets predict that interest rates will reach 2.5 per cent by the middle of next year as policymakers battle to contain inflation.

But the Bank signalled they may not go as high as that because it could leave inflation below the 2 per cent target at the end of its forecast.

The report makes for painful reading, with household income under severe pressure ahead of a predicted 40 per cent hike in the energy price cap in October.

The headline CPI inflation rate reached 7 per cent in March, the highest since 1992, and is tracking higher as the Ukraine war and pandemic fallout drive up energy and food prices.

Dominic Cummings calls for voters to unite to oust ‘pointless’ Boris Johnson 

Boris Johnson’s former Downing Street Svengali has urged voters from across the political spectrum to unite to kick him out of office in a sensational election day attack. 

Lambasting the Prime Minister as ‘pointless’, Vote Leave mastermind Dominic Cummings this afternoon urged Remains, Brexiteers and those on the  left and right of politics to join forces to deliver ‘regime change’.  

Mr Cummings, who was booted out in December 2020 after losing a power struggle with Mr Johnson’s wife, accused the Conservatives of being ‘politically, & organisationally rancid’ in a Twitter tirade.

He accused them of focusing too much on ‘culture war’ issues like trans rights at the expense of law and order and the economy.

It came as Mr Johnson braces for a battering over Partygate today as voters go to the polls in local elections – with the outcome in key battlegrounds set to decide his fate.

The PM has cast his own ballot in Westminster as Tories anxiously wait to assess the damage from the Downing Street scandal, with thousands of councillors being elected across the country.

Using his favourite description of Mr Johnson as a ‘wonky shopping trolley’ on Twitter, Mr Cummings said: ‘Vote Tory = more… taxes, regulation, sh*t bureaucracy, violent/sex crime, neglect of security/armed forces, A&E disasters / NHS neglect, chance of nuclear war … while idiots babbling about trans & other sh*te get promoted all over SW1.

‘Tories and their wider support in media/’think tanks’ etc are so intellectually, politically, and organisationally rancid that a change of leader may well not change these dynamics, but there is NO chance of even discussing serious change unless the [wonky shopping trolley] is replaced.

‘Only point of [wonky shopping trolley] as PM was to act as spokesman for the Vote Leave agenda while we pushed everything in a different direction. Once this was 99 per cent abandoned in 2020 the entire spectacle is pointless *for all except the [wonky shopping trolley] himself* who enjoys riding his bike at Chequers etc

‘Unless you’re someone like Nadine [Dorries, the Culture Secretary] or the Telegraph (‘the real boss’) or Zelensky’s social media crew, it’s irrational to prop up the (clown) show any more. ‘Remain/brexit/left/right/political/official, all shd unite in removing pointless fkd’.

He is not the only former high ranking Tory who advocated voting against the party today. Ex-minister Nick Boles, who quite Parliament in 2019, revealed today he had voted for Labour.  

A dire set of results could be terminal for Mr Johnson, as MPs mull whether to launch a coup bit after he was fined for breaking lockdown rules.

 

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The MPC said today: ‘Consumer Price Index inflation is expected to rise further over the remainder of the year, to just over 9 per cent in 2022 Q2 and averaging slightly over 10 per cent at its peak in 2022 Q4.

‘The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October.

‘The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices.

‘Given the operation of the price cap, consumer price inflation is likely to peak later in the United Kingdom than in many other economies, and may therefore fall back later.

‘The expected rise in CPI inflation also reflects higher food, core goods and services prices.’

Deputy governor Ben Broadbent said the UK economy is facing a shock on a bigger scale than that seen in the 1970s oil and energy crisis, though he said it is not set to last as long.

Growth of 0.9 per cent was better than the Bank expected in the first three months of 2022, but it predicts the economy will flatline in the second quarter before dropping by nearly 1 per cent in the closing three months of 2022.

While the rate of unemployment will ease back further to as low as 3.6 per cent, it will jump back up to 5.5 per cent within three years, according to the Bank.

Now that rates have hit the 1 per cent threshold, the Bank also confirmed it will start drawing up plans for selling off some of its £847 billion in Government bonds – built up as part of its quantitative easing programme launched in 2009 amid the financial crisis.

Shadow chancellor Rachel Reeves accused ministers of ‘shrugging their shoulders’ about the looming hit to incomes. 

‘Rising interest rates and further troubling growth downgrades underline not only how the Tories are failing to tackle the cost of living crisis, but also how poorly they’re managing our economy,’ she said.

‘This will seriously worry families across the country already dealing with soaring prices and bills.

‘Not only are Ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with fifteen Tory tax rises that will further stifle our economic growth.’

Ms Reeves repeated Labour’s call for a windfall tax on oil and gas companies to raise money for handouts.

Suren Thiru, head of economics, at the British Chambers of Commerce (BCC), said higher interest rates would only raise the risk of recession.

‘The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures many are facing,’ he said.

‘The Bank of England faces an unenviable trade-off between soaring inflation and a wilting economy.

‘However, higher interest rates will do little to address the global headwinds and supply constraints driving this inflationary surge.

‘It also raises the risk of recession by damaging confidence and intensifying the financial squeeze on businesses and consumers.’

The Bank’s announcement came after the Federal Reserve lifted its benchmark interest rate by half a percentage point yesterday with US inflation running at a 40-year peak.

Paul Johnson, director of the respected IFS think-tank, warned earlier of the impact on people’s mortgages of raising interest rates.

‘We are still at historically staggeringly low levels of interest rates,’ he told Radio 4’s Today programme.

‘So you look at it that way and think one quarter of a percent, half a percent, still a very low level, that doesn’t look very dramatic.

‘On the other hand, of course, if you’ve got a mortgage and it goes up by half a percent or 1 per cent proportionally that’s a very big increase.

‘That could be doubling your mortgage interest payments over a period of time, so even small changes now, at least down the line once people certain fixed rates run through, could have really big effects on people who have got significant mortgages.’

The Bank has sharply downgraded growth for the coming years, with expectations that UK plc will stagnate

The Bank has sharply downgraded growth for the coming years, with expectations that UK plc will stagnate

The forecast for headline CPI inflation now shows it will go above 10 per cent at the end of this year, before dropping back

The forecast for headline CPI inflation now shows it will go above 10 per cent at the end of this year, before dropping back 

The Bank unveiled a doomsday-style set of figures in its latest MPC report today

The Bank unveiled a doomsday-style set of figures in its latest MPC report today

The Bank's interest rate is now at the highest level in 13 years - albeit still historically very low

The Bank’s interest rate is now at the highest level in 13 years – albeit still historically very low

The parlous state of UK plc was underlined today with a survey showing confidence at companies in the UK’s service sector, including retailers, hospitality and leisure industries, has hit the lowest level in 18 months.

The closely-followed S&P Global/CIPS business activity index showed the sector is still growing, scoring 58.9 in April.

But this was down from 62.6 in March, with anything above 50 as a sector in growth.

Bosses warned that costs for goods hit a record high last month, with the cost of business and the impacts from the ongoing war in Ukraine slowing the speed of growth in the sector.

On the final day of campaigning ahead of today’s local elections, the Prime Minister vowed to ‘support people in any way that we can’ in the face of the cost of living crisis. 

During a visit to Southampton, Mr Johnson said: ‘The best future for the country is to get through the tough patch we have now, support people in any way that we can, but remember we are now seeing a lot of employment and people in high-wage, high-skilled jobs.’

The PM also warned against imposing a windfall tax on big energy companies.

He said a tax would ‘stop investment’ in urgently needed new solutions and green energy for the country to build up its own energy supplies.

‘The problem we have is that… this is an incredible country, incredible economy, fifth biggest in the world, but we’re mainlining energy from France,’ he said.

‘It’s insane. We haven’t invested enough in our own domestic energy and we need these big energy companies to step up to the plate and put their money into sustainable solutions. That is a much better solution than clobbering them and stopping them from making that investment.’

The Government has been criticised for failing to do more to help ease the cost of living crisis – and pressing ahead with deeply unpopular tax rises including the hike in national insurance.

But while inflation is at a 30-year high of seven per cent and could even hit 10 per cent later this year, unemployment is just 3.8 per cent. It has not been lower since 1974, and was above 10 per cent for much of the 1980s and early 1990s.

A former member of the Bank’s Monetary Policy Committee claimed yesterday that the UK economy is already in recesssion and interest rates should be slashed.

Professor David Blanchflower, who sat on the MPC between 2006 and 2009, insisted it would be an ‘error’ for interest rates to be raised further.

In response to soaring inflation, the Bank has raised interest rates three times in a row since December from 0.1 per cent to 0.75 per cent.

The rate of Consumer Prices Index inflation increased to 7 per cent in March from 6.2 per cent in February, the Office for National Statistics has said.

The rate of Consumer Prices Index inflation increased to 7 per cent in March from 6.2 per cent in February, the Office for National Statistics has said.

Official figures showed GDP increased by just 0.1 per cent in February, compared to the robust 0.8 per cent seen in January

 Official figures showed GDP increased by just 0.1 per cent in February, compared to the robust 0.8 per cent seen in January

And there is a widespread expectation that the MPC will raise rates once again tomorrow.

But Prof Blanchflower pushed back at the belief that further rates rises were needed from Threadneedle Street to deal with inflation, as he predicted the UK economy would begin to ‘tank’.

‘The reality is it looks like the US and the UK are actually already in recession,’ he told BBC Radio 4’s Today programme.

‘The European Central Bank, faced with much the same circumstances, actually is not raising rates.

‘So there is really a question about whether you should raise rates – even though there’s inflation present – when it looks like the economy is either headed to, or in the UK case, looks already to be in recession.’ 

How high will interest rates go? Bank of England hikes base rate to 1% in battle against rampant inflation – but three MPC members called for a bigger 0.5% rise 

The Bank of England hiked the base rate to its highest level for 13 years today, with a 0.25 per cent rise to 1 per cent.

The rate rise to battle surging inflation – now expected to average 10 per cent over autumn – should benefit savers but will hit mortgage borrowers and businesses, who face higher borrowing costs.

Led by Governor Andrew Bailey, the Monetary Policy Committee increased the key UK interest rate from 0.75 per cent to 1 per cent. Today marks the fourth meeting in a row since December that the Bank has upped interest rates. 

The MPC voted by a majority of 6-3 to increase Bank Rate, as it is officially known, by 0.25 percentage points, but the members in the minority were not advocating that rates should be held and instead preferred a 0.5 percentage points rise to 1.25 per cent. 

On the up: The Bank of England has upped UK interest rates to 1% today

On the up: The Bank of England has upped UK interest rates to 1% today 

The Bank also upped its forecast for UK inflation, which it now believes will average 10 per cent in the final three months of the year as autumn turns to winter and higher energy bills bite.

The MPC said: ‘In the May Report central projection, CPI inflation is expected to rise further over the remainder of the year, to just over 9 per cent in 2022 Q2 [second quarter] and averaging slightly over 10 per cent at its peak in 2022 Q4. 

‘The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October. 

‘The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices. 

‘Given the operation of the price cap, consumer price inflation is likely to peak later in the United Kingdom than in many other economies, and may therefore fall back later. The expected rise in CPI inflation also reflects higher food, core goods and services prices.’

Inflation is forecast to continue its spike and now climb above 10% before falling back. This Bank of England chart shows its expectations and how energy costs are having an impact

Inflation is forecast to continue its spike and now climb above 10% before falling back. This Bank of England chart shows its expectations and how energy costs are having an impact

Why is the Bank of England raising interest rates?

Consumer prices index inflation has already hit a 30-year high of 7 per cent in March – way above the 2 per cent target – and is forecast to peak in double-digits.

Central banks initially believed that the inflationary surge of the Covid recovery would be transitory, however, price rises across the economy affecting consumers and businesses have become persistent.

The Bank of England and other major central banks are now fighting to avoid high inflationary expectations becoming baked in to consumer, worker and business expectations.

The basic principle behind monetary policy is that by raising the cost of borrowing, central banks can reduce demand for it and reduce the amount of money being created by banks through loans that flows through into the economy.

Today’s interest rate hike will hit around 2million borrowers with variable rate mortgages, but about three quarters of UK mortgages are protected in the near term by fixed rates.

Savers look set to, in theory, see their returns grow further, with the best savings rates already having risen substantially in recent months.

Businesses will see non-fixed rate lending and new borrowing costs rise. 

> Compare the best fixed mortgage rates that you could apply for 

Interest rates are expected to continue to rise this year, with base rate climbing to about 2.5 per cent in mid 2023 before falling back to 2 per cent

Interest rates are expected to continue to rise this year, with base rate climbing to about 2.5 per cent in mid 2023 before falling back to 2 per cent

How high could interest rates go?

The Monetary Policy Report alongside the rate decision sets out the Bank of England’s market-implied path for the base rate.

This sees Bank Rate rising to 2.5 per cent by the middle of next year, before falling back to 2 per cent at the end of the forecast period.

Although this would see interest rates remain low by historic standards, they would be far higher than was expected until recent months.

What is happening in the economy? 

The Bank’s rate hike comes as the rising cost of living and the war in Ukraine have slowed down the recovery of the key services sector, according to fresh figures. 

The cost of living crisis is set to worsen further in October, when another increase in the energy cap is expected. 

The latest S&P Global/CIPS business UK services Purchasing Managers’ Index scored 58.9 in April, down from 62.6 in March.

Services firms, which range from banks to hairdressers, account for 80 per cent of the total UK economic output, so a slowdown indicates a loss of momentum in the whole economy.

Rising costs and the war in Ukraine have slowed down the recovery of the key services sector

Rising costs and the war in Ukraine have slowed down the recovery of the key services sector

Businesses recorded the fastest rise in costs in almost 26 years in April, with energy, wages and fuel all going up in price. In turn, companies hiked prices they charge to customers at close to record pace.

New business growth slowed sharply and was the weakest so far this year. Meanwhile, business confidence dropped to the lowest in a year and half as firms worried about rising costs.

Andrew Harker, economics director at S&P Global, said: ‘The twin headwinds of the cost-of-living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far.

‘Worryingly, companies seem to be expecting impacts to be prolonged, with business confidence dropping to the lowest in a year-and-a-half.

‘Indeed, cost pressures show little sign of abating, with inflation even accelerating in April to the strongest in almost 26 years of data collection.

‘The feeding through of these cost pressures to charges for customers means that the spell of rapid inflation clearly has further to run.’

GDP growth is expected to tail off and the economy could potentially shrink next year in this Bank of England forecast

GDP growth is expected to tail off and the economy could potentially shrink next year in this Bank of England forecast 

Martin Beck, chief economic advisor to the EY ITEM Club, said figures suggest the UK economy is in for a sharp slowdown this quarter.

‘The forward-looking indices of April’s survey fell back at a faster rate than the headline index, suggesting growth in activity will slow further during Q2.

‘This evidence of a loss of private sector momentum reinforces the EY ITEM Club’s expectation that GDP growth will slow significantly in Q2.’  

On Wednesday, the US Federal Reserve unveiled its biggest interest rate hike in over two decades as it toughens its fight against rapidly surging prices. 

The Fed said it was upping its benchmark interest rate by half a percentage point, to a range of 0.75 per cent to 1 per cent after a smaller rise in March. With US inflation at a 40-year high, further hikes are expected, just as they are in the UK.

The push from the Fed marks the latest effort to contain spiking costs being felt by households around the world.

On Wednesday, India’s central bank announced an unexpected increase to its benchmark rate, while Australia’s central bank recently enacted its first interest rate hike in more than a decade.

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Source: Daily Mail

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