Experts warn that Britain is at “risk of an unnecessary recession” if the Bank of England fails to cut interest rates quickly enough.
Households in the United Kingdom have suffered from rising mortgage payments and debts after the Bank of England’s decision to raise the country’s base interest rate.
The central bank has raised interest rates several times in the past 18 months to try to curb the rate of Consumer Price Index (CPI) inflation.
With inflation falling to 3.9 percent, analysts expect interest rate cuts later in the year, but some worry that the central bank’s tightening is being “reversed too slowly.”
Experts warn that Britain may be exposed to an “unnecessary recession”
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A recession is defined as occurring when a country experiences two consecutive quarters of negative growth.
While the UK has avoided this so far in 2023, experts worry that keeping interest rates high could lead to a recession.
According to Tom Stevenson, investment director for personal investing at Fidelity International, the latest GDP numbers for October 2023 could be a harbinger of further economic turmoil.
The UK economy fell by 0.3 per cent during the month compared to a rise of 0.2 per cent in September 2023.
Stevenson believes negative GDP growth, coupled with the implications of high interest rates, will be a headache for Britons.
“This built on other recent signs of weakness in the UK economy, including a slowdown in the rate of wage growth and a decline in inflation from a peak of 11.1 per cent to 3.9 per cent,” he explained.
“The Bank of England itself has warned that nearly a million homeowners face a mortgage rise of £500 a month by 2026 as fixed rate deals are repriced.”
The investment expert pointed out that inflation is still higher than the goal desired by the Bank of England, which is 2 percent.
The Bank of England will likely not cut interest rates until later in 2024
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As such, the central bank may be reluctant to cut interest rates immediately until the CPI price falls further.
Stevenson added: “Central banks know they cannot wait for prices to fall completely before easing monetary policy.
“The lag between interest rate cuts and their impact on the economy increases the risk of an unnecessary recession if policy tightening is rolled back too slowly.”
The Bank of England’s Monetary Policy Committee (MPC) is scheduled to provide an update to interest rates on 2 February 2024.