Are continued rate increases a one-way ticket to a deeper recession? -
rate increases

Are continued rate increases a one-way ticket to a deeper recession?

The spate of interest rate increases seen in the UK since December 2021 has had a massive impact on households and businesses across the country. With inflation at its highest level in decades, the Bank of England has been aggressively hiking rates with a series of 0.25% hikes followed by the latest rate increase of 0.5%. These hikes have taken the base rate from 0.25% eight months ago to 1.75%.

With consumers and businesses already struggling with higher prices on everything from food and petrol to energy and other essential costs, the rate hikes have put many under added financial pressure. Officials from the central bank have said that the aggressive action around interest rate hikes is vital to get inflation back under control. However, they have also admitted the nation could be teetering on the brink of recession and that inflation will likely remain high for the next year.

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Industry experts have now said that if interest rates continue to rise, the recession experienced in the UK could be much more profound. But with predictions that inflation will rise as high as 13%, further rate hikes are inevitable, meaning finances will become even tighter for many people.

A grim outlook for the economy

Industry analysts have said that the outlook is bleak for the British economy if interest rates continue rising.

Walid Koudmani, chief market analyst at XTB, said: “We saw investors sell out of their pound sterling positions in reaction to the UK’s biggest interest rate hike in 27 years. The hike itself was widely expected but the moods of GBP investors dampened from the negative rhetoric from the Bank of England itself on the UK’s economic outlook. The UK central bank expects the UK economy to shrink in the final quarter of this year and suffer from a recession for all of 2023. This marks a stark turn in their projections.”

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With the economy still reeling from the Covid-19 pandemic, the current situation has made things even more brutal in terms of recovery. It has also put the Bank of England in a challenging position, as it has to balance soaring inflation with the impact of regular interest rate increases.

interest rate

However, Koudmani said the central bank has very few options left in the current climate, and there is little it can do to help the country avoid a recession in the coming months.

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He added: “The Bank of England is stuck in between a rock and a hard place. On the one hand, inflation is now expected to peak at 13 percent. This is far higher than recent projections and would normally force them to act faster to hike interest rates to curtail this cost pressure. Yet, on the other hand, they expect UK economic activity to shrink and continue to do so for around the same time as the previous financial crisis. In that sense, they simply cannot move too far on rates or they will lock in a much deeper recession.”