We have heard the phrase “unprecedented times” over the past few years. And the last 24 months have been a rollercoaster as the world comes to terms with post-Covid life.
As global economies recover, as many countries recover from the pandemic, significant challenges still arise.
There have been notable periods in history when interest rates have been much higher, but with rates that have stayed so low for so long, we are now seeing the impact of that and I think that will continue for long time.
On August 4, 2022, the Bank of England (BoE) raised interest rates to 1.75%, which was expected. It was the sixth consecutive increase in interest rates and the largest in 27 years, as the UK’s central bank strives to bring inflation back below its 2% target.
With other central banks raising their rates, this trend should continue for the foreseeable future. The challenge for many is that not only are borrowing costs rising, but household budgets are coming under significant pressure as the cost of living continues to rise sharply.
Some commentators predict the UK faces a tougher race as households are more exposed to energy price increases and have less government protection than in other countries.
What future for interest rates?
The idea that interest rates will rise is not new.
There was a lot of speculation in 2015 that they would go up, but inflation dropped so the rates stayed the same. The BoE was so concerned about the EU referendum in 2016 that it lowered interest rates. Before Covid, the BoE started raising interest rates to 0.75% in 2018, but then cut rates to 0.1%.
As a population, we have enjoyed borrowing cheaply in the years since 2007 to help stimulate the economy and reduce borrowing costs. Those times are long gone, as the Bank of England predicts it could raise interest rates to 3% in the third quarter of 2023.
What else could influence the level of interest rates?
With borders reopening and demand for goods and services resuming, supply chains have been significantly compressed with shortages throughout the process. The ripple effect is the delays and price hikes that ultimately fuel the rise in inflation.
Inflation is well above the BoE’s official target and continues to climb. It is now at 9.4%, which is the highest level in 40 years and is expected to increase further to 13% by the end of the year, and could rise further due to rising costs. energy.
- Bank of England’s change in approach
The Bank of England’s monetary policy committee’s support for low interest rates has disappeared, although it is unusual to raise interest rates when there is a risk of recession.
The post-Covid UK economy is heading into a recession. During the pandemic, the UK economy shrank by 9.9%, but then rebounded to post-Covid levels in 2021.
However, the war in Ukraine has put significant pressure on energy and food costs, which have dramatically increased costs, leading the BoE to predict (and roughly confirm) that the United Kingdom would enter a recession by the end of 2022 and that it would last for more than 12 months.
In addition, unemployment rose for the first time in a year.
The UK economic growth forecast is changed and the Bank of England estimates that the UK economy will contract by 1.25% in 2023 and 0.25% in 2024.
Mortgage interest rates are already soaring. While many borrowers currently have fixed rate mortgages, as these products mature the rates available will be significantly different from what they are accustomed to. With higher borrowing costs, coupled with the spiraling cost of living individuals are already experiencing, this is simply putting additional pressure on household incomes.
All forecasts point to the Bank of England continuing to raise interest rates over the next 12 months as the UK grapples with rising energy costs, post-Covid challenges and events that affect us all.
We’re probably going to be in for a bumpy ride, buckle up.