The Bank of England’s fight against inflation risks dragging Britain into a “protracted recession”, economists have said.
If interest rates remain at current levels, gross domestic product (GDP) will plummet by 0.2% in the first quarter of this year and 0.4% in the next quarter.
Yesterday (February 1), the central bank confirmed it would keep the benchmark interest rate at 5.25% in order to bring inflation down to its desired target of 2%.
But economists warn that this risks triggering two consecutive quarters of negative growth, known as a recession.
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Inflation is expected to fall It will fall below 2% by the summer, but rise again in the second half of 2024, with analysts pricing in a significant cut in the benchmark rate later this year.
Christopher Siepman, Senior Economist generali asset managementhighlighted that GDP growth is expected to jump from 0.3% this year to 0.6% in 2025.
“This is primarily due to our assumption that key interest rates will be cut by 4.2% by the end of 2024 and 3.4% by the end of 2025, in line with current market expectations,” he explained.
“In an alternative scenario, if the Bank of England maintains its current policy stance of 5.25%, the UK would remain in recession throughout the forecast period.”
Mr Siepman said the UK economy did not need such a tough policy on interest rates, even if the central bank’s inflation target was not met.
Based on the central bank’s model, keeping the benchmark interest rate at 5.25% would cause inflation to reach 2% in the short term and fall to 1.2% year-on-year by the second quarter of 2026.
“In the long term, this will mean excessive tightening, which will come at the cost of a prolonged recession,” Siepman added.
“We therefore expect the Bank of England to begin cutting interest rates by 25 basis points in June (May is now less likely in our view today) and by a total of 100 basis points by the end of 2024. However, this is broadly consistent with the market’s view.”
The Bank of England kept interest rates unchanged at 5.25% again.
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Yesterday, the central bank’s governor, Andrew Bailey, confirmed that the central bank is aiming to keep inflation in check over the long term, rather than just hitting the CPI target temporarily.
“We expect to be close to our goal this spring. Of course, that’s very good news,” Bailey said.
“However, we do not expect this level to hold and then rise somewhat again after that. And it is precisely that ‘subsequent period’ that we focus most on when setting policy. is. In particular, it is necessary to assess the short-term impact of energy prices. ”