The Bank of England has forecast that the UK could enter recession at the end of 2022 amid spiraling inflation and slow growth. The economy is expected to contract in the last three months of 2022 and continue to decline until the end of 2023. The current recession is expected to be the longest since the 2008 financial crisis although it is not likely to be as severe as it was 14 years ago, it could last just as long.
High Inflationary Environment
The inflation was aggravated in recent months as Russia cut back on natural gas supplies to Europe in response to the west’s support of Ukraine. There are growing concerns that Russia could shut off the supplies completely. This led to an unprecedented increase in energy prices worldwide. As such, the soaring prices of petrol, diesel, and food affected households. Although the UK is less reliant on Russian energy supplies than countries such as Germany, the ripple effects of the crisis are becoming evident in the prices of natural gas. According to the central bank, increased costs of natural gas would cause consumer price inflation to rise from 9.4% in June 2022 to 13.3% in October 2022.
Biggest Interest Rate Hike Since 1995
To control the soaring inflation, the Bank of England raised its benchmark interest rate on August 4, 2022, to 1.75% from 1.25%, the highest since 1995 and the first half-point increase since the bank’s independence in 1997. The decision is in line with the recent increase in the rate by the Federal Reserve of the US and the European Central Bank, which indicates concerns that the longer the inflation is allowed to continue, the more difficult it would become to bring it under control.
Outlook
The current economic environment continues to be challenging for policymakers since most factors causing inflation are aided by external uncontrollable events. The central banks around the world are struggling to strike a balance between the efforts to reduce inflation and limit the negative effects on economies that just started to recover from the COVID-19 pandemic. High rates of interest make borrowing more expensive for individuals and businesses, which tend to curb spending and ease rising prices. However, such actions could hamper the overall economic growth.
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