UK To Enter 'Milder Than Expected' Recession This Year, Bank of England Says

The Bank of England has raised UK interest rates by another half a percentage point to 4% but gave its clearest signal yet that borrowing costs may now be nearing their peak.

The UK is now expected to enter a “milder than expected” recession later this year, according to the Bank of England.

This was the bank’s tenth consecutive rate hike, but in the accompanying documentation it hinted that it might be the last for now, saying it would only raise rates further “if there was evidence of more persistent.” [inflationary] Burdens” than in his forecasts.

These projections suggest that inflation has now peaked and will gradually decline this year and next, eventually falling below the Bank’s 2% target.

The bank also upgraded its forecast for the economy.

While it’s still forecasting a technical recession this year, it would be a very shallow recession with headline growth falling 0.5% in 2023, compared to its November forecast of a 1.5% contraction.

(c) Sky News

Seven members of the nine-member monetary policy committee backed the half-point hike, but two members — Swati Dhingra and Silvana Tenreyro — voted to put borrowing costs on hold.

All in all, while the rise today is significant, the notes in the bank’s minutes represent a clear change of tone.

Previously, she said she was prepared to respond “strongly” to higher inflation; This time this language has been removed.

It had previously said that further rate hikes may be needed if the economy behaves in line with its forecasts; This time she hinted that rate hikes depended on higher inflation than her forecasts.

The language shifts leave the door open for further modest hikes in the cost of borrowing but provide the clearest signal yet that UK interest rates are now at or near their peak.

Although the outlook for the UK economy is better than the Bank’s previous forecasts, it is nonetheless far weaker than in recent years.

While the average growth rate in the UK was around 2.5% before the financial crisis and around 1.5% after the pandemic, the bank expects underlying growth to be just 0.7% in the coming years.

Additionally, with national income projected to fall this year, she now expects the size of the economy in 2026 to still be at 2019 levels – a full seven years of lost growth.

Many other countries around the world have already passed their post-pandemic levels; According to the Bank’s figures, the UK will suffer from this through the second half of this decade.