In a bid to control the rising inflation in the United Kingdom, the Bank of England has hiked the interest rate to 3% from the existing 2.25%. This is the highest-ever rise in interest rate in 33 years.
The country’s central bank has also asked citizens to brace for the longest-ever recession in the history of the European nation. The increase in the interest rates is set to take the borrowing rates in the UK to their highest level since the 2008 financial crisis, reported BBC.
Prices in the UK have been rising at their fastest pace in the past four decades, propelled upwards by the COVID-19 pandemic and then by the Russia-Ukraine war. The interest rates have been on the rise since December last year due to the measures taken by the central bank to tame inflation. The consumer price inflation in the UK returned to a 40-year high in September.
Increasing interest rates result in loans becoming costlier which leads to less spending on houses, cars, land, and other assets by consumers.
The Bank of England’s move is likely to be welcomed by many, who are set to receive greater rewards on their deposits in the bank. However, it is likely to burn a big hole in the pockets of those who have payments outstanding on their mortgages, home loans, credit card debts, and other borrowings.
A recession happens when a country’s economy shrinks for two quarters in a row. Unemployment rates tend to climb during recessions, and people’s salaries often fall as companies make less profit due to lesser demand.
The Bank of England has stated that the economy has already entered a “challenging” downturn. This is expected to continue into 2023 and then into the first half of 2024.
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