In order to save the UK economy, as it faces the scare of recession, the Bank of England has raised interest rates for the fourteenth time, to 5.25%.
The central bank cautioned businessmen and individuals that, as a measure to prevent inflation spike, the cost of borrowing would remain costly for the next two years.
As to recession, policymakers have projected that, over the next two years, the topic of economic downturn remains an impossibility.
They further explained the importance of raising the current interest rate by 0.25 percentage points, which happens to be the biggest increase in fifteen years.
In the same vein, some members of Bank of England’s Monetary Policy Committee (MPC), agreed to a decision that, the economy showed its ability to withstand the pressures of rising interest rates than they expected, during their last evaluation of the economy in May.
An economist and member of the Bank’s MPC, Swati Dhingra, stated that, it’s very necessary to give recent interest rate increases the ample time to have an impact on households and company budgets, and also slow down expenditure. Dhingra further disclosed that, she voted to keep the rates steady.
According to the Bank of England, the enormous upsurge in cost of service and the increasing labour demand, which has driven salaries higher, have all proven to be persisting barriers to lowering inflation rates.
The most recent labour market data revealed that, the average salary increases stood at 7.7% in the month of June, while consumer price index decreased from 8.7% to 7.9% in May.
However, with the government aims of lowering inflation rate from its peak of 10.5% at start of the year, to 5% by the end of the year, inflation has been projected to decline to 5% in the 4th quarter, at the backdrop of falling energy prices.
Also, policymakers revealed that, they would see to it that the cost of borrowing “will be sufficiently restrictive for sufficiently long to return inflation to the target,” which means, interest rates could stay over 5% next year and beyond.
Per minutes released from the MPC meeting, the sharp increase in interest rates from 0.1% in 2021, limited economic spending and assisted in the reduction of inflation.
According to the most current projections, the economy will see a massive growth over the next three years, but by just a percentage.
Early this year, the Bank of England was compelled to revise its predictions of a protracted economic collapse this year and 2024, after gross GDP statistics indicated that, the UK economy dodged the decline, prompting series of backlash on the Governor Bailey.
Andrew Bailey, the Governor of Bank of England, averred that, he supported the 0.25% percentage point rate increase, stating that, the Monetary Policy Committee’s inputs have set inflation to decrease to its 2% benchmark.
“Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make sure that it falls all the way back to the 2% target. That’s why we’ve raised rates to 5.25% today.”
Andrew Bailey, Governor, Bank of England.
By 2026, it has been projected that, the most recent rate increases and the possibility that rates could stay higher for two years, will hamper GDP growth by an additional 0.75 percentage points, possibly stalling the economy from growing above its pre-pandemic level.
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