Interest Rates to 13-Year High, Recession Coming, BoE Says

The economy will contract in 2023, the Bank of England predicted today

James Gard 5 May, 2022 | 1:05PM
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Britain is heading for a recession next year, the Bank of England (BoE) said today, as it unveiled a 25 basis point rise in interest rates to 1%, the highest since the financial crisis.

The downbeat forecast dominated what was a predictable rate rise announcement. Combined with a prediction of 10% inflation this year, this is unwelcome news for the government as voters head to the polls for local elections.

The BoE says the economy is expected to slow sharply in the coming months, reflecting the impact of rises in energy prices and general goods because of supply chain issues.

This is expected to take a chunk out of UK households’ income and company profit margins.

Still, the jobs market is expected to hold up this year, with another fall in the unemployment rate. But the Bank expects this rate to push up to 5.5% by 2025 as a result of the slowdown. Current unemployment rates in the UK are 3.8% and the labour market is "tight", with shortages of skilled workers and an increased bargaining power over pay.

The Bank had previously forecast a 1.25% rise in economic growth in 2023, but it has now revised this sharply downwards to -0.25%. Two quarters of negative growth are usually required before a recession is officially declared. That would mean a recession just three years after the last one, which is a highly unusual shortening of the recent economic cycle.

Our chart on the UK economy shows the extent to which 2020 was an outlier in history, but, that considered, economic forecasting has become more difficult since the Covid-19 crisis, and certainly since the invasion of Ukraine. For its part, the International Monetary Fund has also recently predicted the UK will have the weakest growth among G7 economies this year, having bounced back quickly from the coronavirus disruption.

Interest rates have risen 10 fold since December, from 0.1% to 1%, hitting the highest level since 2009. The Bank was then cutting rates in response to the global financial crisis. Interest rates were cut from 1.5% to 1% in February 2009, then halved in March of that year - before staying unchanged until August 2016.

Financial markets are now pricing in interest rate rises at the Bank’s next four meetings, in June, August, September and November. The Bank is currently forecasting interest rates will peak at 2.5%, which piles pressure on mortgage owners looking to fix, but is also tempting savers to stick with variable rates. 

Six members of the monetary policy committee voted for a 25 basis point rise to 1% in May, while three voted for an even larger increase to 1.25%. Last night the Federal Reserve increased rates by 50 basis points, but poured cold water on the idea of a mega-hike of 75 basis points at the June meeting.

UK inflation is expected to hit 10% to peak but is forecast to fall back to the inflation target of 2% within two years. Still, the Bank warns that this forecast for a drop in inflation is highly dependent on a drop in energy prices, the path of which is shrouded in uncertainty.

The European Union has just agreed to stop buying Russian oil and gas from 2023 onwards, which is likely to keep supply tight and prices high. BoE governor Andrew Bailey said in a press conference today that the "shock to income" faced by UK households is likely to curb inflation in the same way that interest rate rises will. He also said that "those with least bargaining power" – i.e. low-income households – will suffer most. The MPC also dismissed talk that higher inflation and interest rates are the "medicine" Britons have to take to lower the cost of living.

Shuffling Deckchairs on The Titanic

Commentators were clearly prepared for the news, and were quick to issue reactions, though commentary on the possibility of a recession was largely absent.

"Today’s move resembles shuffling deck chairs on the Titanic," says Hinesh Patel, portfolio manager at Quilter Investors. 

"As was widely expected, the BoE has once again had no choice but to hike rates in its attempt to contain inflation at an appropriate level, this time to 1%. This marks the fourth consecutive rate rise since the BoE began its fight against inflation back in December 2021 when it first raised rates following the pandemic, and the Bank Rate now sits at a level not seen since the aftermath of the financial crisis in early 2009.

"While the BoE may be putting up a confident front, given the current delicate market environment, we could easily see inflation continue to rise above the BoE’s forecasts. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudence remain key."

Not on Steroids

Agnès Belaisch, Barings Investment Institute's chief strategist for Europe says:

"This hike now opens the door for outright bond sales from the BoE’s balance sheet and may appear like a hike on steroids, but it is not.

"The BoE has to remain cautious, like other hawkish central banks around it, because the consumer is in danger from an adverse supply shock that combines with a terms of trade shock, given significant GBP depreciation.

"These require a finely balanced policy response to minimise the impact of a policy tightening when the economy is suffering from higher energy and food prices. Yet, outright quantitative tightening will save on rate hikes and it is in that light that, if the BoE is only considering the option at this stage, it is likely to activate the tool later this year. It takes a particular mindset to tame inflation in the midst of a weakening economic environment."

More Hikes on Way

Janet Mui, Brewin Dolphin's head of market analysis, says further hikes are on the cards.

"Many will be hoping the Bank lives up to its reputation for unreliable forecasting. The BoE arguably faces more challenges than the Fed in the fight against inflation and is accepting there will be some economic collateral damage. 

"Despite the economic concerns, the BoE is most likely to stick with further rate hikes, as the fight against inflation involves some inevitable economic suffering. Financial markets continue expecting the Bank rate to rise in each of the next four meetings."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for


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