Interest rates rise as Bank of England warn of recession and 10% inflation

Interest rates rise as Bank of England warn of recession and 10% inflation

Interest rates rise as Bank of England warn of recession and 10% inflation

The Bank of England has warned that the UK economy will shrink this year as it raises interest rates to try to stem the pace of rising prices.

Base rates were hiked to 1% from 0.75% (50% higher), their highest level since 2009 and the fourth consecutive increase since December.

With fuel, energy and food costs soaring partly due to the Ukraine war, inflation is now at a 30-year high and will reach 10% by the end of the year, according to Bank of England Governor Andrew Bailey.

Ordinary people are starting to rein in spending which is hitting growth.

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Will higher interest rates curb inflation?

Higher interest rates make it more expensive for consumers and businesses to borrow, leading to lower spending and demand. People start spending less, demand for goods and services cool slowing the pace of price rises.

However, there are some economists who think that that increases in interest rates may have little effect in a situation of rising global oil and gas prices.

The Bank of England’s Monetary Policy Committee (MPC) said the UK economy is expected to contract in the final three months of this year. It is also expected to shrink by 0.25% in 2023, down from the Bank’s previous forecast of 1.25% growth.

The MPC has also slashed its growth outlook for 2024 to 0.25%, down from 1%.

Bank of England governor Andrew Bailey said the UK was set for “a very sharp slowdown” but declined to call it a recession.

A majority of six members of the Bank’s MPC voted to lift interest rates to 1% but the remaining three members wanted a steeper rise to 1.25%.

The Bank now expects inflation to hit 9% in the coming months – up from its previous forecast of 8% – and to reach 10.25% by the end of the year.

Fed raise rates by highest in 22 years

The US central bank has announced its biggest interest rate increase in more than two decades as it toughens its fight against fast rising prices.

The Federal Reserve said it was lifting its benchmark interest rate by half a percentage point, to a range of 0.75% to 1% after a smaller rise in March.

With US inflation at a 40-year high, further hikes are expected.

Last year, the Fed and BOE claimed that inflation was transitory and temporary.

Stock markets around the world ended the week in the red with the Nasdaq falling 5% on Thursday, the largest fall in two decades.

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