News

Tough road ahead for UK economy, warns University of Salford expert

  • Rate rises risk making recession even deeper after largest rate increase since 1989
  • Autumn statement later this month is key
  • Uncertainty over future direction of interest rates

As anticipated, the Bank of England (BoE) has today increased interest rates from 2.25 % to 3%. This is the eight consecutive increase in the bank rate and the highest rise since 1989.  The BoE also predicted that the coming recession could last for two years and be one of the longest in history.

Dr Maria Rana, macroeconomic expert from the University of Salford Business School, comments on the announcement.

She said: “Despite being largely anticipated, the decision taken by the Monetary Policy Committee today has been challenging, or as the BoE’s Governor, Andrew Bailey, put it, the Bank had to “fly blind” since the Government has delayed the autumn statement.

“The BoE has been left blind not knowing how tight (contractionary) the fiscal policy will be. The U-turns on the catastrophic mini-budget of Truss and Kwarteng announced by the new Chancellor Jeremy Hunt have been well received by the markets and the interest rate did not have to rise as much as it would have had if there had not been a change in fiscal policy and Prime Minister.

“However the uncertainty on how far the Government will now go with its spending cuts and increase in taxes, has made the decision of the BoE even more difficult . Given that the BoE has also forecasted the longest period of recession, with prediction that the GDP will fall for eight consecutive quarters, it seems that such an increase in the cost of borrowing to cool the economy was not needed.  There is now the risk to make recession even deeper.

“The Governor has justified today’s decision by explaining that inflation might increase even higher than the 40-year high (10.1 %) in September, due to the disruptions in supply chains post pandemic, the war in Ukraine and decrease in the labour force. Bailey has also announced that there is a ”tough road ahead”  but the Bank also does not expect interest rates to raise as much as markets expect.

“Let’s now wait for the autumn statement and spending review later this month to see how tough the road ahead will be.”