Bank of England warning: ‘Risk of recession’ as interest rates could rise next week
Martin Lewis predicts interest rates will continue to rise
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The Bank of England’s Monetary Policy Committee (MPC) is set to confirm a potential rate rise on Thursday, June 16, 2022. This would represent the fifth consecutive interest rate by the financial institution in a row in a bid to mitigate the impact of inflation, which is currently at nine percent. Last month, the Bank announced that the country’s base rate would rise from 0.75 percent to one percent
Many experts believe that an interest rate rise will take place next week, hiking the base rate even further to 1.25 percent.
If this were to happen, this would be the first time since January 2009 that the base rate was higher than one percent.
Financial analysts are warning that any hesitance on the Bank of England’s part to intervene could result in the pound being weakened.
An even weakened pound would result in the cost of fuel going up in the UK, which is already being affected by the war in Ukraine and pressures in the wholesale gas and electricity market.
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On top of this, experts believe that inflation is likely to hit ten percent in the coming months which means further interest rate increases could be necessary.
Inflation and fuel price hikes have exacerbated the UK’s cost of living crisis, with energy bills expected to hit £2,800 by October.
As a result, many households will be looking towards the Bank of England on Thursday to ease their concerns about the economy.
Laith Khalaf, the head of investment analysis at AJ Bell, shared why he believes the “risk of recession” is likely to depend on the bank’s decision.
Mr Khalaf explained: “The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.
“Sterling has already fallen around eight percent against the dollar this year, even though markets are pricing in a fifth consecutive interest rate rise from the Bank of England in June, so any signs of dovishness could weaken the currency further.
“The problem is that the Bank is caught in a pincer movement, with eye-watering inflation on one flank, and the risk of recession on the other.
“News that the average cost of filling a family car is set to breach £100 landed on the same day the OECD forecast the UK will be the weakest G7 economy in 2023, which sums up the bind the central bank finds itself in.
“By raising interest rates, the bank is putting the brakes on an economy that is already slowing of its own accord. That risks the economy stalling, or worse, going into reverse.”
Citing the recent support payments announced by Rishi Sunak last month, the financial expert outlined why this latest intervention has provided “breathing space” for the Bank of England.
He added: “The Chancellor’s latest package of measures to address the cost of living crisis does alleviate some pressure on the Bank, offering up a bit of breathing space to raise rates.
“Consumers probably won’t be best pleased to find that some of the fiscal giveaways they have been handed by the Chancellor are going to be gobbled up by higher borrowing rates.
“But if the Bank fails to take action and the pound comes under further pressure, that also adds to the cost of living crisis, by pushing up the price of commodities priced in dollars, especially fuel. It feels like there are simply no good options in front of the Bank of England.”
Furthermore, the expert highlighted the potential ramifications a rise in interest rates would have on homeowners across the UK.
“A rate hike will feed through into higher mortgage rates, though the effect on consumers is likely to be a slow burn, as homeowners roll off the fixed deals which became so popular as rates plummeted,” Mr Khalf said.
“On the flip side of the coin, we can expect better returns for cash savers, who are now seeing significantly higher interest rates on offer, though they probably have to seek them out. Of course, that is an entirely pyrrhic victory with inflation heading into double digits.”
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