The Bank of England has raised the interest base rate by 0.5% to 4%, the highest level for 14 years. It now forecasts that the UK will enter a recession in 2023, though this will be shorter and have less of a negative impact than once previously thought.
The bank uses interest rates as its main economic tool to control inflation. With inflation at 10.5% as of December 2022, it is now over five times higher than the bank’s benchmark rate of 2%.
However, increasing interest rates leads to higher borrowing costs and reduces the incentive for businesses to invest.
According to the Bank of England’s revised forecast, the UK economy is projected to shrink by 1%. This is contrary to the previous estimate of 3% as a result of the continuing fall in energy prices. Currently, wholesale gas prices are trading at 145p/therm, compared to 640p/therm.
Unemployment, presently at 3.7%, is now expected to peak at 5.3% rather than the forecast of 6.4%. However, the potential for a restricted labour pool remains for those who are deemed economically inactive.
In terms of inflation, it is now being forecast that the rate will begin to fall from 10.5% in December 2022 to 8% in June 2023 before falling again to 5% by the end of the year.
Despite this more positive news though, the Bank of England is also highlighting that the economy will not be back to pre-Covid levels until 2026, two years longer than previously suggested.