NEWS BRIEF
Provided by: RS Risk Solutions Ltd
“Tough Road Ahead” as Interest Rates Increase Again
During a Monetary Policy Committee (MPC) meeting on 2nd November, the Bank of England (BoE) raised interest rates for an eighth consecutive time in a bid to curb inflation. The MPC voted in a majority of 7-2 to increase the bank rate by 0.75 percentage points to 3%, the largest single rise since 1989. The BoE also warned of a “tough road ahead,” predicting that the UK could face the longest recession since records began.
Recession Explained
The generally accepted UK definition of a recession is when the gross domestic product falls in two successive quarters, indicating a period of severe economic slowdown. According to the BoE, the British economy shrunk in the second and third quarters of 2022 so the UK is technically already in a recession. The current downturn is expected to last until the first half of 2024.
Such a prolonged recession may significantly affect businesses of all types and sizes. Typically, in periods of economic slowdown, companies make less money, pay falls and the unemployment rate rises. In response, the BoE’s recent interest rate increase aims to tackle inflation in an attempt to settle volatility in financial markets.
Unfortunately, the BoE’s increase will add hundreds of pounds to mortgages across the UK, affecting both businesses and households. Additionally, organisations may find it more difficult to achieve borrowing or secure credit. And, at a time when energy prices have soared and inflation remains at an all-time high, this additional financial burden will be felt by many.
However, BoE Governor Andrew Bailey validated the move, saying, “Low and stable inflation is the bedrock of a stable economy” and “If we do not act forcibly now, it will be worse later on.”
Next Steps
The BoE has cautioned that further increases may be necessary in order to bring down inflation to its 2% target. The BoE is currently forecasting a peak interest rate of 5.25% during the second quarter of 2023. However, this prediction is subject to change and doesn’t account for any measures that may be announced in the government’s upcoming Autumn Statement.
Conclusion
With a prolonged recession forecast, employers must implement measures to bolster business resilience and consider cost-cutting strategies, such as freezing non-essential spends. However, it’s important to remember that during times of economic volatility—where business risk is heightened—that some costs, such as insurance premiums, remain a worthy investment.
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