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Warning UK economy to shrink as interest rates rise

Warning UK economy to shrink as interest rates rise

The Bank of England has warned the UK economy will shrink this year as it raises interest rates to try and stem the pace of rising prices.

Rates rose to 1% from 0.75%, their highest level since 2009 and the fourth consecutive increase since December.

Inflation, at its highest for 30 years, is set to breach 10% by the end of the year, with fuel, energy and food costs soaring partly due to the Ukraine war.

As a result, people are reining in their spending which is hitting growth.

The Bank raised interest rates again to try to contain the rising cost of living.

Raising rates makes it more expensive for consumers and businesses to borrow. The idea is this helps cool demand for goods and services, thereby taming prices.

But economists have warned rate rises may have little effect given the rising global oil and gas prices. The Bank's Monetary Policy Committee (MPC) - which sets rates - also acknowledged there were "risks" in raising rates, and said it would continue to review "incoming data".

The UK economy is now expected to contract by 0.25% in 2022, down from its previous forecast of 1.25% growth. While that would not technically be a recession - defined as two consecutive quarters of contraction - it would leave the UK at a real risk of one.

The MPC has also slashed its growth outlook for 2023 to 0.25%, down from 1%.

Governor of the Bank of England Andrew Bailey said the UK was set for "a very sharp slowdown" but declined to call it a recession.

He also defended raising rates at time when the cost of living is rising, saying that the risk of letting inflation get out of control was higher.

"We have been very careful in our response, taking into account the scale of the shock to the economy."

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Author: BBC

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