Interest rates increased to 4.25% by Bank of England - UK faces ‘full-blown recession'

Bank of England

The central bank’s Monetary Policy Committee (MPC) has announced a 0.25 percentage point increase to the country’s base rate. For the past year, the Bank of England has hiked interest rates multiple times in an attempt to rein in inflation with this being the 11th increase in a row.

Bank of England

During the MPC’s meeting to discuss changes to the base rate, the committee voted to raise interest rates to 4.25 percent.

This announcement comes following yesterday’s revelation that Consumer Price Index (CPI) inflation rate for the 12 months to February 2023 rose to 10.4 percent.

Financial analysts were surprised by the Office for National Statistics (ONS) figures, having initially forecast a drop in inflation for the period.

As a result, experts shared that another hike to the base rate of at least 0.25 percentage points was “locked in” to contend with this increase in CPI inflation.

Workers in Britain have been warned their retirement plans may be held hostage by high inflation rates and the cost of living crisis. The consumer price index jumped to 10.4 percent in the 12 months through February from 10.1 percent the previous month, the Office for National Statistics said on Wednesday.

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Joe Nellis, a professor of Global Economy at Cranfield School of Management, warned of the potential economic catastrophe that awaits following today’s announcement.

Prof. Nellis said: “The Bank of England’s decision to increase interest rates to 4.25 percent could push the economy into a full-blown recession. A growth recession was inevitable prior to the rise, but the vote by the MPC will only delay any prospects for an economic recovery.

“Why has the Monetary Policy Committee voted to make matters worse? Households are already facing the biggest fall in their living standards for many decades, and the banking sector is under strain. Further interest rate rises will do more harm than good at this stage.

“The Bank of England must pause and wait to see if inflation plummets in the months ahead.”

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Richard Campo, founder of Rose Capital Partners, said: “Many experts currently believe that rates will fall to around 3.5 percent over the next five years. yet just a week ago, we were prepared for a levelling out at four percent, versus three to four weeks ago when we were braced for more rate rises on the cards.”

He explained: “Many experts currently believe that rates will fall to around 3.5 percent over the next five years. yet just a week ago, we were prepared for a levelling out at four percent, versus three to four weeks ago when we were braced for more rate rises on the cards.

“But, back in January, we felt that rates would drop to as low as 3.5 percent later this year / early next.

“What this proves is that we’re living through a constantly shifting period impacted by inflation uncertainties, wobbles in the global banking sector and recession fears (or not) on the horizon.”

Interest

On top of this, concerns have been raised that the central bank’s constant intervention could potentially trigger a recession down the line.

Alastair Douglas, CEO of TotallyMoney, emphasised the pain raising the base rate has caused to hundreds of thousands of Britons.

Mr Douglas said: “The Bank of England’s rampage on interest rates has pushed people’s finances to the limit, and an estimated 356,000 mortgage borrowers are expected to be facing repayment difficulties by the end of June next year.

“While it’s past its peak, inflation remains at sky-high levels. Four in ten households are spending less on food shopping and essentials, and they’ll be in for a fresh shock next month when suppliers hike water, council tax and telecom bills among others.”

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As part of the base rate announcement, the central bank’s MPC noted that global growth is expected to be stronger than originally forecast in last month’s predictions.

Furthermore, while CPI inflation in advanced economies was recognised as continuing to be high, the Bank found that wholesale gas and oil prices have fallen substantially.

However, the Bank of England did cite potentially damaging “volatile moves” in the financial markets, namely the collapse of Silicon Valley Bank and the purchase of Credit Suisse.

According to this month’s report, Government bond yields remain overall uncaged and risky asset prices are somewhat lower compared to the month before.

Today’s announcement will come as a blow to the 1.4 million people on variable rate mortgages who will see an even greater increase than expected.

Mortgage holders who are coming off of a two-year fix onto a standard variable rate (SVR) at £250,000 of borrowing are set to see costs rise by £8,000 a year, according to AJ Bell.

The decision by the Bank of England to raise the base rate could see further intervention taken by National Savings and Investment (NS&I) when it comes to its savings products.

The central bank’s MPC is next scheduled to meet to discuss the base rate on Thursday, May 11, 2023.