• Swindon & Wiltshire News
• Thursday November 3 2022
• Author Name: Peter Davison

The UK is in recession – and it will be a long one, warns Bank of England as its raises interest rates

The Bank of England has warned that the UK is already in recession – and that this could be a long one.

Publishing its November Policy Report this afternoon (Thursday) the bank estimated the economy went into recession in the third quarter of this year, as households struggled with energy and food prices.

It predicts the recession will last until 2024 “as high energy prices and materially tighter financial conditions weigh on spending.”

Interest rates were increased by 0.75 per cent to three per cent – the largest single rate increase in three decades.

The bank said this inflation was too high and had made the move to get inflation back to two per cent. Inflation, it said, would fall sharply next year.

Responding to the announcement, the British Chambers of Commerce called the interest rates rise ‘a blunt instrument and further headache for business.’

David Bharier, head of research at the BCC, said: “The decision to raise the base rate to three per cent comes as no surprise following the market turmoil caused by September’s mini-budget.

“The Bank has laid down a clear marker that it intends to bring inflation down by placing further pressure on consumer demand.

“But raising the interest rate is a very blunt instrument to control inflation that is largely the result of global factors, including soaring energy costs and supply chain disruption.

“This is further bad news for businesses who find themselves trapped between rising costs of raw materials, energy and borrowing, and weakening consumer demand.

“The Bank is now clearly indicating the UK economy is set for a prolonged recession. Our own research shows that business confidence has been falling at an alarming rate over recent months, driven by runaway inflation.

“But even as evidence of a recession mounts, cost pressures on businesses may yet continue as the energy price cap expires next April.

“With the Chancellor and Prime Minister both signalling that the Autumn Statement is likely to result in spending cuts and tax rises, businesses will be extremely worried about what the future holds.

“It is crucial that the Government sets out a long-term plan that stabilises the economy and focuses on growth.”

The FSB said the move would leave businesses ‘between a rock and a hard place’.

National chairman Martin McTague said: “Whatever the macroeconomic justifications for this latest rise, the eighth in a row, its effects will be felt immediately on the ground by small businesses carrying many kinds of debts, as well as by hard-pressed consumers.

“Consumer confidence in October was only slightly above its all-time low in September, which spells worrying news for countless small firms relying on consumer spending in the so-called ‘golden quarter’ running up to the festive season.

“Our research found that firms in the hospitality sector had a confidence reading almost twice as negative as the overall score for all sectors in Q3, raising fears of a wave of closures if prospects do not improve this winter.

“Prior to today’s base rate hike, small firms were already telling us that the availability of new credit worsened in the third quarter, and that finance was already getting more costly, adding to the financial pressures they face.

“Inflation is still sky-high, especially for business inputs, where it is running at around twice the rate of that felt by consumers.

“Today’s rise may be seen by markets as necessary and inevitable, but for small businesses struggling under a debt burden and seeing decreases in custom that will be cold comfort.

“The Chancellor must not forget small businesses and self-employed people in the upcoming Budget.

“While there are undoubtedly tough decisions ahead, a further drop in small business numbers, after 2020 and 2021 saw a combined loss of nearly half a million, will hamstring the UK’s economic recovery before it has a chance to get going.

“Action on late payment at least would be a godsend for small firms, opening up flows of working capital to keep them able to trade. The long-running scandal of large corporates’ poor payment practices must end, and the sooner the better.”

The CBI said the government now needed to ‘reinforce markets’ faith in the UK’s hard-won reputation for stability’.

Alpesh Paleja, lead economist at the CBI, said: “The Bank has deployed a bumper rate rise, underscoring the scale of the UK’s inflation challenge. A weakening economy and tighter fiscal policy is set against volatility in global energy prices, stubbornly high inflation expectations and persistent wage pressures.

“With monetary policy focused on tackling inflation, the government’s immediate priority should be to reinforce markets’ faith in the UK’s hard-won reputation for stability – but fiscal sustainability and growth shouldn’t be an either or choice.

“The Autumn Statement must learn the lessons of the 2010s: fiscal sustainability and lifting trend growth are both priorities. Alongside protecting the most vulnerable, the government should safeguard capital spending and investment allowances to enable private sector investment to drive future growth.”

Locally, Matt Griffith, director of policy at Business West, said: “The Bank has unfortunately found itself in a position of not wanting inflation expectations to become embedded in the UK economy and facing strong pressure from international markets to raise borrowing costs. This is not a great place to be.

“But raising the interest rate is a very blunt instrument to control inflation that is largely the result of global factors, including soaring energy costs and supply chain disruption.

“This is further bad news for businesses who find themselves trapped between rising costs of raw materials, energy and borrowing, and weakening consumer demand.

“The Bank is now clearly indicating the UK economy is set for a prolonged recession. Our own research shows that business confidence has been falling at an alarming rate over recent months, driven by runaway inflation.

“But even as evidence of a recession mounts, cost pressures on businesses may yet continue as the energy price cap expires next April.

“With the Chancellor and Prime Minister both signalling that the Autumn Statement is likely to result in spending cuts and tax rises, businesses will be extremely worried about what the future holds.

“It is crucial that the Government sets out a long-term plan that stabilises the economy and focuses on growth.”

Members of Thames Valley Chamber of Commerce will have a chance to discuss the impact of the rate increase with Andrew Holder, agent for Central Southern England for the Bank of England, at its quarterly briefing next Thursday, November 10.

The Bank of England’s Agency for Central Southern England visits the Thames Valley on a quarterly basis, to gather information directly from local business leaders.

It is this data, together with equivalent data from the 11 other regional agents, that is fed back to the bank’s Monetary Policy Committee in order to make a decision on the position of interest rates.

The briefing will be held at Green Park Conference Centre, Reading from 7.30am. Bookings can be made at https://www.thamesvalleychamber.co.uk/event-details/quarterly-inflation-report-briefing-with-the-bank-of-england/46830/

The bank also pays attention to the Quarterly Economic Survey from British Chambers of Commerce. Businesses can complete the survey at https://www.britishchambers.org.uk/page/quarterly-economic-survey-2

Bank of England image by George Rex, published under Creative Commons licence.