The UK will tip into recession in the third quarter. The Bank of England made the announcement on Thursday when it announced a 0.50 percentage point increase in its key interest rate, a significant increase but less than expected by some analysts, while she said the UK economy will contract by 0.1% between . July and September. It will be a second consecutive decline in economic activity which meets the definition of a technical recession.
Record inflation among the G7 countries
The policy rate thus rose to 2.25%, a first since 1995. Aim: To bring down UK inflation, which peaks in October at almost 11%, against the 13% forecast so far. At 9.9% over the year in August, a record among G7 countries, inflation is weighing on the UK economy and threatening to plunge the country into recession by 2023, according to the latest forecasts from the BoE.
Aid package worth over £100 billion
New finance minister Kwasi Kwarteng is due on Friday to draw up a plan to help households and businesses, which is expected to include an energy price cap and is expected to cost more than £100 billion. While this will mechanically lead to a fall in prices and hence inflation, the measure could push households to consume more and therefore increase it in the longer term, prompting the BoE to be firmer. The central bank therefore risks acting against the tide of the current government, while reproaches are piling up against the monetary institute, criticized in particular by Liz Truss and by Kwasi Kwarteng for not having prevented inflation from flaring up to its highest level in 40 years.
Bank of England criticized
During her campaign to succeed Boris Johnson, Liz Truss suggested reviewing the status of the Bank of England, whose independence dates back to 1997. She believed that the BoE should have acted more quickly, even though interest rate rises started at the end of 2021 in the UK before Fed’s and ECB’s.
Central Bank governor Andrew Bailey defended himself in early September, saying the inflation was mainly due to Britain being “heavily exposed” to rising gas prices due to its reliance on this energy source, whose supply has been hampered by the war in Ukraine and curtailment of Russian export.
From now on, the government can, on the contrary, blame the central bank for interest rate increases, which make borrowing more expensive for the British, but also for the state.