It is now ‘inevitable’ that the UK economy will go into recession due to the Bank of England’s (BoE) inability to curb rising inflation, former interest rate-setters have reportedly predicted.
It comes as the BoE is Bank of England is poised to raise interest rates for the 13th time in a row after disappointing inflation figures showed price rises have not eased. The UK’s Consumer Prices Index (CPI) was unchanged in May at a rate of 8.7%, according to the Office for National Statistics.
Ex-members of the Bank’s Monetary Policy Committee (MPC), which is responsible for deciding the UK’s official cost of borrowing, have said interest rates will need to rise further to bring down inflation. But the experts believe this will cause at least two consecutive quarters of negative growth – pushing the economy into recession.
READ MORE: Adviser to Chancellor urges Bank of England to trigger recession
It comes as concerns have mounted over the mortgage market, with the average two-year fixed residential mortgage rate surpassing 6%, according to data from Moneyfactscompare.co.uk.
The grim outlook comes as the Office for National Statistics said inflation remained unchanged at 8.7 per cent in May despite the Bank’s forecast that it would fall to 8.3 per cent. More worryingly, underlying inflation that strips out volatile price movements in food and energy also rose unexpectedly to 7.1 per cent – the highest it’s been for 31 years.
Most analysts expect the Bank of England to hike interest rates from 4.5 per cent to 4.75 per cent today, although there’s growing speculation the MPC might even opt for a 0.5-point increase. Adam Posen, who served on the MPC in the wake of the financial crisis, told the Telegraph that a recession is inevitable as he believes rates will eventually have to climb to at least 6.5 per cent to rein in soaring prices.
“There will be damage, but it is necessary,” he said, adding that rates will need to stay at 6.5 per cent for “up to six months” in order to properly tackle inflation.
Karen Ward, an executive at JP Morgan Asset Management and member of Chancellor Jeremy Hunt’s economic advisory council, said the Bank has to “create a recession” to control inflation. She also slammed the Bank for being “too hesitant” in the past.
However, a source at the Treasury reportedly distanced the department from her comments, noting that she was speaking in a personal capacity.
Another member of Mr Hunt’s panel of experts and who previously served on the MPC, Sushil Wadhwani, said “it might take rates of 6 per cent” to get inflation back under control.
“The prospect of even more tightening obviously does not bode well for the economy,” he said. “The higher that rates need to go the greater the probability of a recession.”
The rise in underlying inflation is especially troubling as it is partly driven by wage growth, indicating that earnings and prices are chasing each other in a dangerous spiral.
Stubbornly high inflation has sent shockwaves through markets, raising the cost of borrowing and causing turmoil for millions of households as lenders reprice mortgage deals amid forecasts of higher rates for longer.
A further 143 mortgage products were withdrawn yesterday morning. Natwest became the first major lender to hike rates after surprise inflation figures were published, raising a number of its two and five-year fixed deals by up to 0.75 per cent.
