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UK: BoE raises interest rate to 1% despite issuing recession warning

UK: BoE raises interest rate to 1% despite issuing recession warning

The Bank of England has reportedly raised the base interest rate for a fourth consecutive time to counter growing inflation in the UK, despite having issued a warning of a recession later this year.

The central bank has predicted that the country’s economy is due to shrink this year, with double-digit inflation and a never-before-seen squeeze on household incomes as the lead culprits.

In its first forecast post the Russian invasion of Ukraine, the bank stated that it is now expecting lasting effects from the energy price crunch, driving up unemployment and causing a negative or weak growth throughout 2023.

However, the bank’s monetary policy committee (MPC), comprised of nine members, voted to increase the interest rate from 0.75% to 1%, which is the highest since 2009.

Three MPC members even voted to have a sharper increase of 0.50%, with the Bank saying that most committee members believe there might be a need to further tighten the monetary policy in the future.

As per the Bank, real post-tax labor income and real household disposable income will decline sharply this year due to soaring energy prices.

The Bank also cut down its forecast for next year’s gross domestic product growth from 1.25% to -0.25%, which usually forecasts a recession coming ahead.

A recession is generally defined as two consecutive quarters of contraction.

The Bank’s projections indicate a sharp 1% fall in the final quarter this year, followed by a weak GDP in 2023 and a further contraction in another quarter around autumn that year.

Unemployment is also expected to start increasing, with the rate reaching 5.5% by mid-2025.

The most severe forecast, however, is of inflation, which is expected to jump to 10.25% by the end of this year.

This would be the highest rate in the UK since the 1980s when the country was experiencing a long period of stagflation, having a low growth and high inflation.

Following the Bank’s latest predictions and voting, pound fell by more than a cent against both euro and dollar, while sterling dropped by two cents.

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Omkar Patwardhan

Omkar Patwardhan started his professional career in the hospitality industry. Having nurtured a deep-sated passion for words however, he found his way into content writing and now pens down articles for numerous websites, including News Origins, spanning the sectors of business, finance, and technology.