During a Monetary Policy Committee (MPC) meeting on Thursday, 2nd February, the Bank of England (BoE) raised interest rates for a 10th consecutive time in an effort to reduce inflation. The MPC voted by a majority of 7-2 to increase the Bank Rate by 0.5 percentage points to 4%, the highest level seen in 14 years. This increase comes even as the BoE said it now anticipates a much shorter and shallower recession than originally predicted.
Economic Outlook
By raising interest rates, the BoE aims to drive down inflation in a bid to tackle the soaring cost of living. Spiralling gas prices and supply chain issues, among other factors, have driven up the price of goods and services. As such, inflation remains close to its highest level in 40 years.
Validating its latest MPC decision, the BoE expects a rapid fall in inflation from December 2022’s 10.5% figure to 3% by the end of the year, dropping further to 1% in 2024. Announcing the recent interest rate rise, BoE Governor Andrew Bailey said that “low and stable inflation is the foundation of a healthy economy.”
Additionally, the MPC released a revised report outlining its more favourable predictions for economic growth. The report confirmed that the UK economy narrowly avoided recession at the end of last year with modest growth in the fourth quarter. It still expects the economy to shrink this year, but by far less than originally predicted.
Nonetheless, the economic landscape remains considerably weaker than in recent years for a variety of reasons—the COVID-19 pandemic, Brexit impacts and the energy crisis, to name a few. In fact, the size of the economy is likely to be at 2019 levels in 2026, a full seven years of lost growth.
Furthermore, the latest interest rate increase will continue to affect individuals and employers, with loans and mortgages becoming more expensive. For instance, a typical tracker mortgage will cost the borrower an extra £49 per month going forward.
Next Steps
While economists are hopeful that the projected recession will be shorter than anticipated, the market volatility of 2022 demonstrated that nothing is guaranteed. As such, it’s important to monitor economic trends while continuing to implement measures to cut costs and bolster business resilience. Moreover, during tough times—where business risk persists—some costs, such as insurance premiums, remain a worthy investment.
Contact us today for more information on preparing your organisation for economic uncertainties.
Contains public sector information published by GOV.UK and licensed under the Open Government Licence v3.0.
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