The governor of the Bank of England justified the institution’s decision to raise interest rates, stating that there is a “real risk” that rising prices may become “entrenched.”
The interest rate increase to 1.75 percent was the largest in 27 years, and inflation is now projected to exceed 13 percent.
This year is anticipated to be the longest recession since 2008, with the United Kingdom falling into a recession.
Increasing interest rates is one method for attempting to limit inflation, as it increases the cost of borrowing.
This should motivate individuals to borrow less and spend less. It can also stimulate more savings.
However, the increase in interest rates will further pinch many households, particularly some mortgage-holders.
Andrew Bailey, governor of the Bank of England, stated, “The fundamental risk we’re responding to is that inflation becomes embedded and does not decline as we would expect.”
“We’ve had a domestic shock and a decline in the labor force over the past two years,” he remarked.
The first topic that companies want to discuss with me is their difficulties with hiring… In addition, they inform us that price increases are now not proving to be tough. Now, we believe that cannot continue.”
He also cautioned against excessive wage increases, stating that they would exacerbate inflation and that those with the least purchasing power would be the most negatively impacted.
Attorney General Suella Braverman, however, stated that interest rates “should have been hiked a long time ago.”
In response, Mr. Bailey stated, “If you look back two years…given the circumstances we faced at that time in the context of Covid and the labor market, I don’t recall many people arguing that we would have tightened monetary policy at that time.
The current rate of inflation in the United Kingdom is 9.4 percent, the highest level in more than four decades.
However, the Bank has cautioned that it might peak at above 13 percent and remain at “extremely elevated levels” for the majority of next year, before returning to the Bank’s target of 2 percent in 2024.
As a result of Russia’s invasion of Ukraine, energy costs have skyrocketed, causing high inflation and dismal economic development.
In addition, increasing gasoline, diesel, and food prices have affected households.
Inflation-adjusted real after-tax family incomes are anticipated to decline this year and next.
Andrew Sentance, a member of the Bank of England’s rate-setting committee during the 2008 financial crisis, told that: “We’re going to witness a couple of years… where household earnings in real terms are squeezed considerably more severely than at any other time since World War II.
The economy is projected to contract in the final three months of this year and continue to contract until the end of 2023.
The anticipated recession would be the longest since 2008, when the UK banking system nearly collapsed, halting lending.
The downturn will not be as severe as it was fourteen years ago, but it may last just as long.
Paul Johnson, the director of the independent Institute for Fiscal Studies, stated that the current economic scenario will necessitate “many more billions to sustain households” and additional funding for public services.
He told that the candidates for the Tory leadership, Liz Truss and Rishi Sunak, should prioritize combating inflation over tax reduction.
Mr. Johnson dismissed the notion that tax cuts might be partially financed with “fiscal headroom.”
“What [the leadership candidates] are talking about is that the Office for Budget Responsibility predicted in March that we would borrow approximately £30 billion less than we needed to accomplish the budgetary goal of a balanced current budget within a few years,” he added.
However, he stressed that this was “very speculative” and “massively out of date” now that the economy is headed for a recession.
Tax cuts
Former Chancellor Mr. Sunak, who has been behind Ms. Truss in recent surveys, has often stated that, if he were to become prime minister, he would prioritize reducing inflation before cutting taxes.
Meanwhile, Ms. Truss has promised a £30bn tax cut package shortly after her inauguration, which Mr. Sunak argues will boost inflation and the cost of borrowing.
Ms. Truss, however, stated that tax cuts would encourage economic growth and avert a recession.
Ms. Truss, who has been skeptical of the Bank, has hinted that, if the elected prime minister, she may seek greater authority over it.
Mr. Bailey stated that the Bank’s independence was “vitally necessary” and that he did not believe there was a “significant desire” in the nation to dispute this.
He said, though, that he was willing to discuss the matter with the next government.
Labour’s Jonathan Ashworth stated that the government’s promised cost of living support measures was “obviously insufficient.”
The shadow work and pensions secretary stated, “There will be families and pensioners across the country waking up this morning and reading the news who are extremely concerned because a juggernaut is going their way and will destroy family finances.”
