Bank of England warns of recession risk in run-up to expected election next year

The Bank of England gave notice that the economy may approach recession during a year of elections and declared plans to maintain high interest rates over a long time to combat persistent inflationary strains.

After deciding not to change its rates, which are currently at 5.25%, for the second time in a row - the same level as during the financial crisis in 2008 - the Bank of England warned that the likelihood of conflict in the Middle East and an increase in domestic inflation would result in interest rates remaining high, despite a negative forecast for economic growth.

Andrew Bailey, who is the governor of the Bank, stated that it is too premature to consider decreasing the rates.

The increased rates of interest are having a positive effect and the rate of inflation is decreasing. However, the target of 2% inflation is still yet to be reached and it is important to keep monitoring it. Despite no change being made to rates this month, the situation will continue to be observed to determine if an increase in rates is necessary.

The central bank has released new predictions amidst increasing criticism of Rishi Sunak’s economic policies ahead of next year's projected election. The latest forecast states that the growth rate will remain stagnant until 2024.

The prediction is that there is a fifty percent chance that a recession will take place next year, which may start around the same time as the spring election. This scenario predicts that the gross domestic product (GDP) will not grow for four quarters in a row if the interest rates follow the expected pattern of the financial markets.

The most recent calculations suggest that Sunak may not achieve his main objective of boosting the economy, which is one of the most important goals of his term as a leader.

The Bank warned that if rates remained unchanged for a longer period than what the market expects, Britain could experience a recession by summer. Recession is typically defined by economists as two consecutive quarters of decreasing GDP.

Rachel Reeves, the opposing chancellor, stated that the economy is heading in the wrong direction, contrary to the affirmations made by Rishi Sunak and Jeremy Hunt earlier this year about stimulating growth. As per these recent statistics, we are not progressing; instead, we are shifting from low development to no progress, which leads to the detriment of employed citizens.

The financial markets rose quickly following the Bank's choice to maintain interest rates, an outcome that was generally anticipated in the business world. Investors believed that the primary central banks across the globe had completed their vigorous cycle of increasing rates, thereby bringing about this positive outcome. The US Federal Reserve and the European Central Bank had also made comparable decisions.

The FTSE 100 finished the day with a 1.4% gain, reaching a total of 7,446. This increase was seen in other parts of Europe as well. Meanwhile, there was a decrease in the yields of government bonds in both the US and Europe, which caused an increase in prices.

Bailey cautioned that there may be a requirement to hike rates in the United Kingdom to guarantee that elevated inflation is eradicated from the economy.

"We mustn't maintain tight monetary policies for too long. It's essential to consider the risks of doing too little or too much," he expressed.

The Bank believes that almost half of the impact of its prior rate hikes is still pending in the economy since millions of households are preparing for the conclusion of their low-priced fixed mortgage deals, which were obtained before the Bank raised the interest rate from an all-time low of 0.1% in December 2021.

The Bank's monetary policy committee had a disagreement over the possibility of prolonged inflation. In the end, the majority voted to maintain the current interest rates. However, three members, Catherine Mann, Megan Greene, and Jonathan Haskel, wanted to start raising rates again and called for a quarter-point increase.

The rate of inflation in the United Kingdom stayed at 6.7% during September. This was due to an increase in fuel costs for drivers over the past few months, which counteracted the slower rise in expenses for a regular grocery shopping trip. Compared to other advanced economies in the G7 group, the UK currently has the highest inflation rate.

According to Threadneedle Street, the inflation rate is expected to decline to approximately 4.75% by the end of 2023 due to previous rate hikes. This would result in Sunak narrowly fulfilling his commitment of reducing the inflation rate by half this year from 10.7% at the conclusion of the previous year.

According to Jeremy Hunt, the chancellor, the United Kingdom has demonstrated great resilience despite what many had assumed. However, he believes that the most effective way to achieve long-term prosperity is through steady and sustainable expansion.

The Bank of England plans to achieve its inflation goal of 2% before the year 2025 ends. However, Bailey cautioned that additional measures might become necessary. He explained that the threat of inflation spikes still exists. Consequently, this affects how they perceive the trajectory of rates.

The world of finance predicts that a reduction in interest rates may occur before the arrival of autumn in the following year.

Axa Investment Managers' G7 economist, Modupe Adegbembo, expressed concerns that inflation may endure at a more substantial rate than initially expected, leading to the Bank having to retain interest rates for an extended period.

However, there is a chance that the Bank may have to reverse the rates sooner and with greater speed in case the prediction for growth worsens quicker than what we presently estimate.