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Bank of England hikes rates again as it predicts recession

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The Bank of England has committed to the biggest interest rate increase since becoming independent 25 years ago, as it expects the UK to plunge into recession by the end of the year. 

 

4th Aug 2022
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With soaring prices and the UK barrelling towards a recession, interest rates have increased today by half-point to 1.75%. This marks the sixth consecutive announcement where the UK central bank has increased the rates, only this time the 0.5% hike is the largest increase in 27 years. 

The increase comes as the worst inflation in 40 years is projected to peak at just over 13% by the end of the year, outstripping the central bank’s previous prediction of 11%. The Bank of England (BoE) also expects the UK to enter recession from the fourth quarter of this year.

The measures are being rolled out to fend off these inflationary pressures, but by the current projections from the International Monetary Fund (IMF), the UK is set for the slowest growth in the G7 next year. In a report released last week, the IMF forecasted that the UK’s growth in 2023 will fall to 0.5%.  

Pierre-Olivier Gourinchas, director of research of the IMF, said: “The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one.”

World economic outlook

The nine members of the monetary policy committee (MPC) voted by a majority of 8 to 1 to increase to 1.75%. The one member of the committee in the minority voted to increase by 0.25% to 1.5% as they have done for the past consecutive meetings of 0.25% to 0.5%.

Today’s announcement was a shift in gears from the central bank, which has only chosen to increase interest rates in recent months by 0.25%.

The BoE may have made a record increase to interest rates in an attempt to tame inflation, but their efforts still train the Federal Reserve in the United States, who increased interest rates for the second month in a row by 0.75%

Inflation fears

The BoE repeated concerns about inflation overshooting its 2% target to 13% at the end of the year. It said inflation is expected to “remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead”.

The bullish half-point increase comes after the BoE stated in June that it would “act forcefully” in response to any “persistent inflationary pressures”. 

The issues contributing to rising inflation haven’t changed since the last announcement where the BoE pinned the blame on large increases on global energy and other tradable goods prices with the former greatly exacerbated by the war in Ukraine.

These challenges haven’t cleared up. “Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI [consumer price index] inflation in the near term.”

The BoE also expects that the typical annual dual-fuel bill will rise from just under £2,000 to around £3,500 in October and also confirmed that gross domestic product (GDP) in the UK is slowing. “The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.”

The current rate of inflation is 9.4%.

Inflation to dissipate over time

The BoE is hopeful though that inflationary pressures are going to dissipate over time. “Global commodity prices are assumed to rise no further, and tradable goods price inflation is expected to fall back, the first signs of which may already be evident. Although the labour market may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023.

“Domestic inflationary pressures are therefore expected to subside in the second half of the forecast period, as the increasing degree of economic slack and lower headline inflation reduce the pressure on wage growth. Monetary policy is also acting to ensure that longer-term inflation expectations are anchored at the 2% target.”

The MPC will meet and announce any further changes to the base rate on 15 September.

Reaction

AccountingWEB readers are likely to be supportive of today’s announcement if their reaction to the last increase was anything to go by. AccountingWEB member Robbie White said back in June that the rates needed to be raised further to 4–5% and predicted then that “11% inflation by the year end seems optimistic”. 

Not everybody was in favour of the increase. “Increasing interest rates will just have the exact opposite effect – it will just push prices up on the whole for the majority of the population,” said AccountingWEB member Viciuno in June. “Price rises are not being driven by excess spending by the population, but by factors outwith the control of the BoE. The largest inflationary pressure at the moment is the price of gas and oil – and no amount of interest rate hikes will solve that problem.”

Lord Sikka, the Emeritus Professor of Accounting at the University of Essex, called hiking interest rates to fight inflation a “crazy policy” days before the BoE’s announcement. “It increases bank profits. It harms SMEs and people in debt who are not awash with cash,” he wrote on Twitter. “It will have little impact on oil/gas and other profiteers. Government needs to increase taxes on the rich and profiteering corporations.”

Fair tax campaigner Richard Murphy echoed this on Twitter: “What I want to know is how increasing these rates will help people pay their gas, electricity, rent, mortgage, council tax, water and broadband bills? If it won’t, why are they deliberately making life impossible for millions?”

Meanwhile, Mazars in June raised concerns about the effect the rate rise will have on UK businesses. The accountancy firm anticipated that the last increase of 0.25% would increase the cost of borrowing and force companies to shut their doors. “If interest rates were to rise to 2%, interest payments for businesses would rise by a further £3.7bn to £14.9bn,” Mazars said. 

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By TB93
04th Aug 2022 12:08

"the worst inflation in 40-years is projected to peak at 15% by the end of the year, outstripping the central bank’s previous prediction of 11%."

I fear for the quality of life over the coming years...

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Replying to TB93:
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By Hugo Fair
04th Aug 2022 15:11

... starting with the lack of proof-reading sub-editors:
".. but their (BoE) efforts still train the Federal Reserve in the United States".

Are the trainers trailing behind the pupils then?

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By onezero
04th Aug 2022 16:26

Why should quality of life always get better, if you want to save the planet and think money solves it then quality of life will not get better - okay that depends on definition of "quality of life".

People need to get a grip on what matters in life - not measured by Apple products etc

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By Nick Graves
04th Aug 2022 12:10

Raising interest rates whilst printing money as if we're Zimbabezuela...WCPGW?

Don't you just love this New Ekonomicks?

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By Hugo Fair
04th Aug 2022 15:19

To bastardise the first line of Pinball Wizard:
"Ever since I was a young boy, I've played the inflation game ..."

But how does it benefit everyone else if I can borrow £1,000 at say 6% interest and use that to buy something now which will go up in price by maybe 15% in a year's time?
All that's happening is that I'm re-paying the original debt with devalued money.

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By vstrad
04th Aug 2022 12:16

It should be made illegal to report economic forecasts, by the IMF or anyone else, without also reporting how accurate their previous forecasts have been.

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By Hugo Fair
04th Aug 2022 15:24

How cynical! :=)
The BoE said "inflation is expected to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead".
Given their previous record of accuracy (give or take a couple of hundred percent), who are we to doubt them?

For those who enjoy a flutter, you won't find "2% in 2 years' time" at good odds.

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By johnjenkins
04th Aug 2022 12:20

You cannot have a global lockdown without consequences. Time the world got its act together. We have the technology so why aren't we sorting it. Oh yes I forgot, politics and religion get in the way.

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Glenn Martin
By Glenn Martin
04th Aug 2022 12:20

This is going to hurt for the kids who got there first mortgage in the last 7/8 years and think that you borrow money at 1 or 2% might start to struggle when there payments double to only 3 or 4%

The TikTok property investors who encourage refurb and refinance on interest only deals might soon be working in bars in Tenerife like the Crypto gurus now are.

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By Self-Employed and Happy
04th Aug 2022 12:46

Banks take that into consideration when giving out mortgages.

The payments themselves wouldn't double if they are on repayment mortgages which the vast majority will be.

What I'm finding is that it is pushing people out of the property investment market as although they can get a mortgage the rents just won't cover a repayment mortgage, they are all being hoovered up by cash buyers, all this is doing is concentrating even more property into the hands of a smaller pool of people.

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Replying to Self-Employed and Happy:
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By Hugo Fair
04th Aug 2022 15:30

"The payments themselves wouldn't double if they are on repayment mortgages which the vast majority will be."

True, but most of the first-time buyers that I meet are so tightly squeezed already that they've been exploring how to *reduce* repayment costs (lengthening the loan period being a favourite) ... and that's *before* any increase in mortgage rates.

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paddle steamer
By DJKL
09th Aug 2022 11:30

They may not double but as in a mortgage's early years most of the monthly payment is interest and less is capital they could go up very significantly.

I think on a 25 year mortgage the capital part of the monthly repayment will not exceed the interest part until year 9 or 10.

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By PAULLEWISFCCA
04th Aug 2022 12:37

price fixing is good for the central bankers

“‘This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’

“But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

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By tedbuck
04th Aug 2022 12:44

Actually the problem here is that the BofE are well behind the ball. They should have increased interest rates ages ago and they should now be at least 5%.
This would have slowed if not stopped the house price rises and thus the rent rises which must be one of the major Costs of Living.
I suppose HMG looked at the Bof E and said "No, we want the stamp duty and the CT on developers profits and th CGT on the land sold for building and not least the IHT when the poor plebs kick the bucket". I read that the IHT take had increased by £1.6 billion. HMG have nothing better to spend it on than MTD so could have done without it.
As for the 'Plebs' well I suppose in earlier years we ( I say we as one of them) would have just buckled down and weathered the storm but the snowflakes of today might miss their holidays or their night out or whatever their thing is and we can't have that can we?
Yes, I do appreciate that there are people at the bottom who really struggle but when a teacher or two tells you the tale of mums who are stoned out of their minds collecting their kids from school you have to wonder where priorities should lie. People should be taught responsibility for their actions and learn that you get 'owt for nowt'. Sadly that is no longer true. But we could do without HMG encouraging it as the really needy will still get left behind and the workshy will benefit as usual.

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By Self-Employed and Happy
04th Aug 2022 12:47

Giving that Stamp Duty holiday when there was absolutely no need for it whatsoever has to be up there with the huge policy "mess" ups of COVID.

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By PAULLEWISFCCA
04th Aug 2022 12:50

Bank of England went bankrupt within 7 years of being formed. But the puppet politicians of the day allowed them to suspend payments in specie (real money). They have run a giant counterfeit scam ever since.

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LL
By RickyRoark
04th Aug 2022 12:53

If only we had some examples from history or other countries where we could see if there was any correlation between levels of government spending, printing money and inflation.

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By Husbandofstinky
04th Aug 2022 13:18

Happy Christmas.....

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By Marlinman
04th Aug 2022 13:23

Don't believe a word politicians say. About a year ago Sunak was asked how he proposed to deal with the government debt and the first thing he said was inflate it away. They want inflation because it dilutes their debts at the expense of those who've been responsible and saved. Rates will need to go a lot higher to get inflation under control and then it will be payback time for those who've lived beyond their means.

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By RickyRoark
04th Aug 2022 13:43

I don't think they specifically want inflation, moreso it's a useful political tool. The measures used to curb inflation whilst practical in an economic sense are wildly unpopular politically.

The party in office usually doesn't care as inflation seldom affects them personally. The opposition party wants more of it as a useful political weapon against the current office. "Look at these guys, they can't control inflation - vote us instead"

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By Martin Thompson
04th Aug 2022 13:39

When I bought my first house, interest rates were 15%.

The crazy low interest/negative interest rates experiment has not helped matters. It was supposed to stop inflation.

Inflation of itself is not a problem. It is the disconnect between Wages and Prices.

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By jamiea4f
05th Aug 2022 15:05

When I bought my first house interest rates were 15% too. However houses were priced affordably (much more so than now) back then, whereas now they are priced ridiculously so much that even a few points upwards will result in a LOT of defaults and bad debts....

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By jamiea4f
04th Aug 2022 13:56

Christ what a shambles. It's almost as if closing economies down for a year and a bit wasn't a good idea after all...

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By PAULLEWISFCCA
04th Aug 2022 14:18

inflation is theft and still so many accountants cant see it

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Replying to PAULLEWISFCCA:
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By Jane31
05th Aug 2022 08:29

"Inflation is an unconstitutional tax." Discuss.

That was an economics A-Level question that I had to try to answer during my studies 42 years ago. I didn't have a clue then and still don't - destined to be an accountant it seems!

Are you able to shed any light on this please as it seems to me that you are saying the same thing?

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By PAULLEWISFCCA
09th Aug 2022 10:56

the kingdom of moltz explains it better than i can

https://www.youtube.com/watch?v=059YiXdMTLo

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Replying to PAULLEWISFCCA:
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By PAULLEWISFCCA
09th Aug 2022 11:01
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By onezero
04th Aug 2022 16:23

Emotive headline - interest rates gone from exceedingly low to very low, if this destroys your small business you never really had one.
Bring on the corporation tax cuts to incentivise business and create real jobs.

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By Ian McTernan CTA
04th Aug 2022 20:02

Can someone explain why the margin on variable rate mortgages has become so high?

Used to be 1.5-2%, now it's 4%. That seems excessive.

Now that rates are rising, I wonder if the banks will restrict rises in the variable rates as their previous excuse at increasing the margin was there was a floor rate under which they couldn't make enough money...

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By PAULLEWISFCCA
09th Aug 2022 11:01

inflation explained in the kingdom of moltz

https://freedom-school.com/tax-matters/moltz.pdf

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By PAULLEWISFCCA
09th Aug 2022 13:31

nothing new under the sun -

Elihu Root (served in Roosevelt’s cabinet in the [email protected]’s), Republican senator from New York, thought he smelled a rat. Anticipating the credit inflations of the future and recalling the disturbances of the past, Mr. Root attacked the bill in this fashion: "Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.

"Bankers are not free from it," Mr. Root went on. "They are human. The members of the Federal Reserve board will not be free of it. They are human....Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.

"That, sir," Mr. Root concluded, "is no dream. That is the history of every movement of inflation since the world's business began, and it is the history of many a period in our own country. That is what happened to greater or less degree before the panic of 1837, of 1857, of 1873, of 1893 and of 1907. The precise formula which the students of economic movements have evolved to describe the reason for the crash following the universal process is that when credit exceeds the legitimate demands of the country the currency becomes suspected and gold leaves the country."

And

From the Panic of 1837

The title of this article is borrowed from Burke; and would that we could borrow, also, the power of cogent reasoning and affluence of eloquent expression which distinguished the writings of that strong and original thinker, for the theme we have to treat of is worthy of such qualities. That theme is the present financial difficulties, which press with intolerable weight upon the community, and force a murmur even from the sturdiest of those who have stood unmoved amidst all former revulsions. The pressure now, unlike that of 1834, is not purposely caused by the strategy of a gigantick monied institution, warring with the government of the country, and attempting to set itself up as a second estate, greater than the people. It is not caused by a withdrawal of mutual confidence between man and man, during the temporary influence of a panick, created and fomented by the demagogues of a desperate party, for a political end. It is not caused by any failure in the sources of real national wealth; by a sudden falling off in the great staple commodities of the land; nor by any extraordinary or unlooked for vicissitudes in the affairs of the countries with which we carry on reciprocal commerce. What then is the cause of the suffering so keenly felt, and so loudly complained of at the present time? To this we answer, throwing all minor and inadequate circumstances out of view, that the pernicious bank system of our country is the cause! That is the fountain from which the stream of mischief issues, swelled, it is true, by unimportant tributaries, but there taking its rise, and thence deriving the chief volume of its waters. That is the source of the modern Phlegethon, whose burning tide sets those who drink it mad, and wastes the land through which it flows, making it a second Tartarus.

Any person who has soberly observed the course of events for the last three years, must have foreseen the very state of things which now exists. Any person who, from the present unhealthy and dangerous elevation to which the business affairs of the community have been pushed, will turn back his eyes in calm retrospection, must perceive that we impute the evil to its true origin. He will see that the banks, ever since the temporary revulsion of 1834, have been striving, with all their might, each emulating the other, to force their issues into circulation, and flood the land with their wretched substitute for money. He will see that they have used every art of cajolery and allurement to entice men to accept their proffered aid; that, in this way, they gradually excited a thirst for speculation, which they sedulously stimulated, until it increased to a delirious fever, and men, in the epidemick frenzy of the hour, wildly rushed upon all sorts of desperate adventures. They dug canals, where no commerce asked for the means of transportation; they opened roads, where no travelers desired to penetrate; and they built cities where there were none to inhabit, which now stand in their newness, like Palmyra in its ruins, untenanted and solitary, amidst a surrounding desert.

. . .

What has been, what ever must be, the consequence of such a sudden and prodigious inflation of the currency? Business stimulated to the most unhealthy activity; a vast amount of over production in the mechanick arts; a vast amount of speculation in property of every kind and name, at fictitious values; and finally, a vast and terrifick crash, when the treacherous and unsubstantial basis crumbles beneath the stupendous fabrick of credit, and the structure falls to the ground, burying in its ruins thousands who exulted in the fancied security of their elevation. Men, now-a-days, go to bed deeming themselves rich, and wake in the morning to find themselves stripped of even the little they really had. They count, deluded creatures! on the continued liberality of the banks, whose persuasive entreaties seduced them into the slippery paths of speculation. But they have now to learn that the banks cannot help them if they would, and would not if they could. They were free enough to lend their aid when assistance was not needed; but now, when it is indispensable to carry out the projects which would not have been undertaken but for the temptations they held forth, no further resources can be supplied. The banks must take care of themselves. “Charity begins at home.” The course of trade is turning against the country. We have purchased more commodities abroad than our products will pay for, and the balance will soon be called for in specie. The banks, which lately vied with one another in effusing their notes, are now as eager competitors in withdrawing them from circulation, and preparing for the anticipated shock. They have no time to listen to the prayers of the deluded men whom their deceitful lures seduced so far upon the treacherous sea of credit. They cast them adrift without remorse and leave them to encounter, unaided and unprepared, the fury of the gathering tempest. Or should, perchance, some tender hearted moneychanger relent, and consent to tow a few victims into harbour, is it unreasonable that he should charge wrecker’s fees for the service—half the cargo and twenty per cent commissions on the remainder? The cashiers of some of our banks can tell you that these are but the usual rates.

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Replying to PAULLEWISFCCA:
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By johnjenkins
09th Aug 2022 15:27

Or perhaps there are some greedy people around that know exactly when to pull the plug and put it back in.

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