Why the Bank of England is putting Britain on a course for recession

Families should prepare for the impact of future pain

Andrew Bailey did not sugarcoat his message. The Governor of the Bank of England, was tough when he announced an increase in interest rates from 4.5pc up to 5pc.

Bailey stated that ” The inflation rate is still too high, and we have to address it.” We know that this is a difficult situation. Many people who have mortgages or loans are understandably concerned about the implications for them.

His message was clear and loud. , the pain is coming and families need to prepare for it.

Bailey has raised interest rates to the hilt, because inflation stubbornly refuses to return to his target of 2pc.

Prices were up 8.7pc in May, the same as they were in April. Core inflation, which excludes energy and food, is increasing. Prices are also rising in the services sector.

All this indicates that inflation is becoming more deeply embedded within the economy. The UK has a higher rate of inflation than the US, France, and Germany.

Bailey stated that recent data showed the need for further action to bring inflation down.

If we don’t increase rates now, things could get worse in the future. We will take the necessary steps to return inflation to 2pc.

The Bank is showing its commitment to the fight against inflation by doubling up rates.

This is because managing expectations is a crucial part of controlling inflation. Staff who expect an increase in prices will demand a raise. If the bosses anticipate higher costs, they will raise their prices. Workers can easily demand more money when there are more than one million job openings.

Bailey wants to convince the nation that inflation has finally been brought under control by talking tough.

It will be difficult and unpleasant to restore credibility and crush inflation. The public will now pay more for business and mortgage loans.

The system will be shocked. According to Oxford Economics research, most companies expect the Bank of England will cut interest rates in late this year or early next. The mortgage interest rate has already doubled over the last year. This is a serious blow for households as their fixed-rate loan ends.

According to the National Institute of Economic and Social Research, more than one million households will be unable to save money by the end of next year due higher interest rates.

Max Mosley said that the rise in interest rates will bring millions of mortgaged households to the edge of bankruptcy.

No lender would expect that a household could withstand such a shock, and neither should the government. Forbearance agreements should be used to give households and lenders flexibility in creating payment plans.

It is almost a certainty that Rishi will again come to the rescue, and offer relief to struggling borrowers. Government sources say that those who expect a bailout will be disappointed.

One senior source says, “There must be a moment where the scales come off your eyes regarding the magic money tree which started the pandemic.”

This is the moment. The Asian countries that did not use the magic money tree as much as Western Europe and America have no inflation problems.

Banks also face another obstacle, as 85pc households have fixed-rate mortgages today, compared to 50pc in 2008, and this is a significant increase. The Bank is also facing another hurdle, as 85pc of households today have a fixed rate mortgage, compared to 50pc in 2008.

The MPC reiterated that “the full effect of the rise in Bank Rate will not be felt until some time” due to the higher share of fixed rate mortgages.

This suggests that rates could need to be raised for longer to make more people feel the pain. Renters have been hit hard by the rising costs of rent as landlords, many with interest-only mortgages, have raised rents in an attempt to meet payments.

This is not good news for the economy. The economy was stagnating even before the latest rate hike.

The GDP increased by a disappointing 0.1pc over the three-month period ending April. The employment rate is at an all-time high, but output barely moves.

It wouldn’t take much for the UK to enter a recession , joining Germany and the Eurozone who are already contracting.

Luke Bartholomew is a senior economist with Abrdn and says that this rate increase means Britain will be heading in the same way.

He says that it is “easier to see” how the UK can avoid a recession in the quest to bring down inflation. This “large rate hike will likely be seen as an important landmark towards that recession.”

Suren Thiru is the economist director of the Institute of Chartered Accountants of England and Wales. He says that the move could even be unnecessary, resulting in a recession that was unnecessary.

He says that raising interest rates won’t do much to alleviate current inflation concerns, given the time lag between the rate increases and their full impact on real economic growth.

By continuing to tighten the credit conditions the Bank is risking overcorrecting past mistakes, and unnecessarily causing a recession.

This is bad news not only for the living standards of households, but also for a government that has set growth as its main goal and needs to have a thriving economy in order to be able offer tax cuts prior to the next elections.

Vivek Paul of BlackRock Investment Institute in the UK, chief investment strategist, believes that long-term, things are even worse.

He says that the question of whether the UK is in a technical or economic recession is secondary. The bigger picture is the anticipated cumulative growth, which is less than 3pc, when combining Bank estimates and actual data over a four-year period from 2022-2026.

Only twice in the past 35 years have we seen such a bleak situation for so long.

Bailey might have been tougher this week. For Britain, this is only the beginning. The economy will be struggling for many years to come.