The Bank of England has issued an unsettling prognosis for the UK economy, predicting stagnation until 2025, coupled with persisting high interest rates or even the potential for further increases. This news came as the Bank upheld rates for the second consecutive period at 5.25%, a 15-year pinnacle.
Chancellor Rishi Sunak had pledged to invigorate UK growth by the year’s end, yet these reduced forecasts cast a shadow over his commitment. Despite the uninspiring financial outlook, Bank chief, Andrew Bailey, maintained that it was premature to contemplate reductions in the interest rate.
However, the Bank anticipates a sharp downturn in inflation – the rate at which prices intensify – in the approaching months. Consequently, the Prime Minister appears on course to fulfil his commitment to slash inflation to around 5% by the conclusion of the year. Before September, the Bank had ramped up rates 14 consecutive times to curb surging inflation, which had been straining household finances.
This move has triggered surges in mortgage payments, thereby pressuring borrowers while concurrently resulting in enhanced savings rates. Bailey affirmed, “We will retain interest rates adequately high for a sufficient duration to ensure that we bring inflation fully back to the 2% target… We will be closely monitoring whether additional rate hikes are necessary.”
The most recent data pegged the inflation figure at 6.7% for the year running up to September. The Bank expects the figure to continue its descent as hikes in energy and food prices ease, and it forecasts that inflation will hover around the 3% mark throughout the coming year, still surpassing the 2% goal.
Consideration has also been given to other potential economic influences. Bailey conceded that unfolding conflict in the Middle East may have subsequent implications for energy prices which are being monitored closely. Yet, despite the human tragedy unfolding, he noted that the situation had not caused significant fluctuations in energy prices thus far – a fact deemed “encouraging”.
While the Bank doesn’t foresee a recession, it predicts zero growth extending into next year and all the way to 2025. Bailey noted that this slowdown mirrors contemporaneous scenarios in other countries, including Germany, Europe’s largest economy, which has been dipping in and out of recession.
Jeremy Hunt, the UK Chancellor, reassured that measures would be taken to stimulate growth as he unveils the government’s economic boost strategy in the upcoming Autumn Statement. He declared, “The Autumn Statement will detail our approach to bolster economic growth by unlocking private investment, reintegrating Brits into the workforce, and fostering a more productive British state.”
Nonetheless, the opposition offered a more cynical perspective, with the Labour Party blaming 13 years of “economic failure” for leaving working families worse off, and the Liberal Democrats lambasting the decision to uphold interest rates as “cold comfort for the millions of hardworking families”.
The economic paradigm is also showing a ripple effect for first-time homebuyers and those re-mortgaging or on variable and tracker deals. The impact is felt through increased mortgage payments, putting extra pressure on homebuyers like Ebony Cropper from Warrington. She and her fiancé have found their goal of homeownership drifting further and further away due to escalating rents.
Though interest rates remain stationary for now, Dr Anna Valero, a member of the chancellor’s economic advisory council, warns of more financial discomfort arising from the prior rate increases. The effects are yet to be fully felt, with major implications for those renewing mortgages next year and businesses witnessing soaring borrowing costs. Yet, amid these challenges, various strategies for easing the burden of mortgage repayments are being suggested, including making overpayments, switching to interest-only mortgages, and extending the lifespan of mortgages.
