According to an article by Bloomberg published on June 27, Bloomberg Economics has warned that the Bank of England’s (BoE) aggressive measures to control the UK’s soaring inflation rate, the highest among the Group of Seven economies, could plunge the country into a recession by year-end. In their analysis published on Tuesday, economists Dan Hanson and Ana Andrade predict a mild yet prolonged downturn as a consequence of tackling an inflation rate that hovers near double digits, despite 13 consecutive interest rate hikes since the end of 2021.

The economists forecast a year-long recession commencing in the fourth quarter, which could result in a loss of just over 1% of economic output. This projection is based on the assumption that the BoE will increase rates to a peak of 5.75% by November, up from the current 5%. However, with money markets almost fully pricing in a 6.25% rate by December, the downturn could be significantly worse.

Hanson and Andrade caution that if borrowing costs exceed 5%, the risk of a financial stability shock increases exponentially. This could lead to a challenging political environment for Prime Minister Rishi Sunak, with potential increases in unemployment and home repossessions due to rising mortgage costs. This comes at a time when Sunak’s Conservative Party is consistently trailing the Labour opposition by over 10 percentage points in surveys.

The Bloomberg article also points out that the BoE’s actions could also invite criticism, especially from Conservative lawmakers facing potential election losses. The central bank may have to reinstate its recession warning in its August forecast, just three months after delivering its largest upgrade since gaining independence in 1997.

Hanson and Andrade have revised their growth estimates for the UK economy to a mere 0.1% for this year and a contraction of 1% in 2024. Despite this, they predict inflation will end the year just above 5%, more than double the 2% target, due to persistent wage growth and cheaper energy boosting household incomes.

The economists warn that the BoE’s aggressive tightening could lead to a deeper recession if the effects of past tightening are longer than anticipated or if high rates create financial instability. They expect the BoE to start cutting rates in the second quarter of next year but proceed cautiously as inflation will still be above target.

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