Economy  

BoE warns of deep recession but hints rates may have peaked

BoE warns of deep recession but hints rates may have peaked
 

The Bank of England has warned that the UK could be facing its longest recession on record, however it strongly indicated that rates may not rise much further than the current 3 per cent.

The central bank raised interest rates by 0.75 percentage points today (November 3), to 3 per cent.

In its guidance, the BoE laid out two possible scenarios for the UK’s economy, with the first predicting interest rates will rise to 5.25 per cent and the UK will be in a recession for at least two years.

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This would mark the longest recession in nearly 70 years.

However, the bank also said inflation could peak at 10.9 per cent at the end of this year, and fall throughout 2023 and 2024 to sit below the 2 per cent target in 2025.

If this were to happen, no further rate rises would be necessary.

Though the country would still experience a recession in this instance, albeit shorter by just under a year.

Ben Kumar, senior investment strategist, 7IM, said anyone looking for “firm commitments” on how high rates will go is “missing the point”.

“The real point is that we’re re-entering an 'inflation-fighting' world – the kind we were in up until 2009…in that world, central banks focus on inflation, not on whether the economy needs emergency life-support.”

This transition will be “jarring” for those who haven’t seen it before, Kumar added.

Chief investment officer at Brooks Macdonald, Edward Park, said inflation in the UK is further complicated by a weak pound that means the country is effectively importing inflation.

“While the Bank of England’s dovish rhetoric may have pushed back against market expectations for UK interest rates, bond markets will bear in mind that the UK is not fully in control of its inflation destiny.”

Focus is now on the Autumn Statement on November 17, which will look to plug a £40bn - £50bn gap in public finances.

The rates decision today did not take into account anything that will be included in the statement, the central bank said, with any additional information to be included in the next MPC meeting in December and its next forecast in February.

Some mortgage deals may become cheaper as a result of the rate rise today, some brokers have said, as some deals had factored in higher rates.

However, renters are likely to be impacted by the rise, said Laura Suter, head of personal finance at AJ Bell.

“Landlords who’ve seen a big rise in their mortgage costs will inevitably pass on some, or all, of the increase to tenants in the form of higher rent. 

“With many landlords having left the market in the pandemic housing boom, and worries about a shortage of rental properties in some areas, rent rises are likely to continue.”

sally.hickey@ft.com