OPINION - Bank raises rates to 4% – recession to be shorter and shallower

In a move in line with City forecasts, the Bank of England has raised interest rates by 50 basis points to 4 per cent, the highest level since October 2008.

The Bank’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to increase the cost of borrowing – the tenth successive hike – in a bid to bring inflation down to its 2 per cent target. You may recall that rates were at 0.1 per cent as recently as December 2021.

Rates are expected to peak at 4.5 per cent by the middle of this year before falling back to 3.25 per cent in the coming years. Crucially, the Bank forecasts that inflation should fall to below its 2 per cent target in the medium term, possibly as low as 1 per cent by 2025.

While today’s rise will have an immediate impact on the 200,000 or so borrowers in London on a tracker or variable rate mortgage, the announcement included some good news. Or at least, less bad.

The Bank now expects a shallower and shorter recession, compared with its November forecasts. The MPC predicts the UK economy will shrink by ‘only’ 0.5 per cent in 2023. This is a far less severe contraction than its previous 1.5 per cent prediction. It also is marginally better than the IMF’s forecast of a 0.6 per cent fall. Indeed it would make for one of the mildest recessions on record. But to be clear, it is still terrible.

The biggest takeaway for me isn’t the change to the forecast depth of the upcoming recession, but what has stayed the same. The British economy is going nowhere, fast. GDP is set only to return to pre-pandemic levels by 2026. For comparison, as I wrote in Tuesday’s newsletter, the US is already 5 per cent above its pre-Covid level and much of western Europe is above theirs as well. The UK, meanwhile, is stuck in the mud. A lost decade is turning into a lost 20 years.

Yes, this recession is set to be shallower than 1980-81, 1990-91 and 2008-09. The difference is, those busts were preceded by periods of boom. This one follows the Covid recession and what feels like perennially flatlining living standards. Put another way: say what you want about the classic England cricket middle-order collapse – at least it presupposes the top-order made runs.

Elsewhere in the paper, Shell’s financial results have reignited calls for a further windfall tax on energy giants. The company posted record profits of £32.2bn, fuelled by soaring oil and gas prices following Russia’s invasion of Ukraine.

In the comment pages,  John Darlington, Executive Director of World Monuments Fund Britain, says on the 300th anniversary of the death of Christopher Wren, we should honour London’s greatest architect far more.

Meanwhile, what’s the last taboo for ‘working-class people like me?’ Getting a cleaner, says Sarfraz Manzoor. And Natasha Devon cuts to the chase: your child has almost certainly watched porn – here’s how to talk to them about it.

Finally, me: isn’t it ridiculous that nine of the top 10 biggest films of 2022 were sequels or spin-offs? Also me: looking forward to watching all seven seasons of Mad Men for the third time.

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