The UK’s sluggish economy could be tipped into recession with forecasts that the Bank of England base rate could climb to as high as 5.75 per cent early next year, according to commentators.
But such is the delicate balance of Britain’s economy one leading economist said recession could yet be avoided despite next week’s expected interest rates hike.
The Bank is widely predicted to raise its base rate by 0.25 percentage points to 4.75 per cent when its Monetary Policy Committee (MPC) meets on Thursday, and the move will mean more mortgage pain for many borrowers, with interest rates on lending increasing as a result. Some are even speculating an increase of 0.5 points, which would bring the base rate to 5 per cent.
Financial markets are predicting the base rate will rise to 5.75 per cent by the end of the year on the back of very strong wage growth figures published on Tuesday which point to inflation having become embedded.
The Chancellor, Jeremy Hunt, has said he is willing to risk a recession if that is the cost of bringing inflation back under control – insisting that the Bank of England should prioritise the fight against price rises in the short term.
But Paul Johnson, director at the Institute for Fiscal Studies think tank, told i: “My sense is we’re not heading for a recession”.
Mr Johnson said that the growth situation was a “lot stronger than the Bank expected at turn of the year”.
The Bank of England uses interest rates to lower inflation and slow the economy, with the logic broadly being that if borrowing costs and savings rates are higher, people will be more likely to curb their spending, bringing prices down as demand falls.
Any recession would cause a political headache for Rishi Sunak, who has promised to “grow the economy” as one of his five key pledges to voters. It would also stoke anger among Conservative MPs who backed Liz Truss, who argue that the Government is abandoning a commitment to growth because it is fixated keeping on short-term borrowing stable instead.
Latest figures released by the Office for National Statistics (ONS) on Wednesday confirm UK GDP grew by 0.2 per cent in April 2023 and 0.1 per cent in the three months to April 2023.
Mr Johnson said: “We’re in a flat situation seeing very low growth, which is not great. It is creating a big headache for chancellor in terms of interest on national debt – but on the other hand will bring in more tax revenue as wages go up faster”.
Mr Hunt said earlier this year that he would back further interest rate rises by the Bank of England even if they risk plunging the UK into recession, and other commentators have said that the risk of such a situation had not totally disappeared.
Marcus Brookes, chief investment officer at Quilter Investors said on Wednesday: “While fears of a recession in the short term have not been realised, the UK is still far from out of the woods”.
Stephen Millard, deputy director at the National Institute of Economic and Social Research (NIESR) told i it was possible that further rate rises could tip the country into a recession – which is defined as two successive quarters of negative growth.
He said growth at the moment was “anaemic” and that monetary policy tightening “could well make a difference and tip us from just above no growth into negative growth”.
He explained that while it was “unfortunate” to do this when times are tough, the Bank would have to raise rates to meet its target of inflation coming down.
And Stephen Yiu, managing partner at the Blue Whale Growth Fund, said the Bank of England “did not have any choice but to tip the country into recession via rate rises”.
“The problem is inflation numbers are seemingly not coming down at all – it’s quite grim” he said.
“If you do increase rates then something is going to give, and unfortunately it’s going to be the housing market, which will trigger a recession”, he said.
Some leading economists have warned against further rate rises in recent months.
In March, former Bank of England chief economist Andy Haldane said that consideration should be given to pausing rate rises.
“I think given the extent of tightening we had during the course of last year, and the early part of this, and given the economy is still on relatively unsteady legs, now might be a time to pause and take stock for a bit,” he said.
