Pound plummets as BoE ignites recession fears by hiking interest rates: ‘Tough times ahead | City & Business | Finance

The Bank of England has warned the UK could be on course for its longest recession since reliable records began in the 1920s. It comes as the pound plummets after they announced a huge interest rates hike. The Bank’s base rate will rise to three percent from 2.25 percent – the highest for 14 years, and decision-makers warned that more increases are likely over the coming weeks and months. Pound sterling has plunged following the announcement, piling more pressure onto the already British currency.

Sterling dropped 1.4 percent to $1.123 against the US dollar so far today and was 0.8 percent lower against the euro at €1.15.

Forecasts say Gross Domestic Product (GDP) could also plunge for every financial quarter over the next two years, with growth only returning in mind-2024.

But the Bank warned this forecast is based on a scenario where interest rates could soar to as high as 5.2 percent, which the BoE said it does not necessarily expect to happen.

The recession could be a drawn-out one but will be less than half as severe as the financial crisis in 2008, the bank added. A recession is defined as when a country’s economy shrinks for two successive quarters.

“In the UK, it is mainly about fear of recession and the fact that the BOE sees recession prolonging for two years; it means tough times are ahead, and we are going to see the economy, markets, and the currency tanking in the coming months.”

Carsten Jung, senior economist at IPPR, said: “There is a real risk of inflation staying too high for too long – so it’s good that the Bank of England is providing a strong signal that it is moving to tame inflation.

“But equally there is a real risk that – taken together – the Bank raising rates and the government cutting spending are taking too much steam out of the economy.

“This could mean that in a year’s time we are in deeper economic peril than we need to be, with the Bank forecasting unemployment to almost double over the next years. The Bank should have moved more cautiously and should only gradually raise rates from now on.”

The BoE warned from its highest to lowest point, GDP is forecast to fall 2.9 percent, compared with 6.3 percent during the financial crisis 14 years ago.

There was more uplifting news on the Bank’s inflation projections after previously warning it could jump to as high as 13 percent in the third quarter of this year.

The Government announced household support for energy – which caps bills at 34p per unit of electricity and 10.3p per unit of gas – will be reviewed in April, and not run for every two years as previously planned.

But the Bank said assuming some supports remains for the full two years, inflation is forecast to drop to 5.25 percent next in 2023 before falling to 1.5 percent in 2024.

BoE decision makers have also warned more interest hikes are likely to follow, but are not expecting to rise as high as the 5.2% that the market has forecast for the final three months of next year.

The bank said: “The majority of the committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than prices into financial markets.”

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