UK economy faces zero growth until 2025, Bank of England warns

UK economy

The Bank of England (BoE) has delivered a gloomy outlook for the UK economy, forecasting that it will see no growth until 2025 due to the impact of the pandemic, Brexit and rising interest rates. The BoE also said that inflation, which hit a 10-year high of 5.1% in October, will remain above its 2% target for longer than expected.

UK economy

BoE holds interest rates at 5.25%

The BoE’s Monetary Policy Committee (MPC) voted by six to three to keep the base interest rate at 5.25%, the highest level since 2008. The BoE had raised the rate by a total of 1.5 percentage points since November 2021 to curb inflationary pressures.

The BoE said that higher interest rates “are working” to slow down the economy and reduce inflation, but added that it was “much too early” to think about cutting rates. The BoE also warned that interest rates are likely to “need to be restrictive for an extended period of time” and that further rate increases may be needed if inflation does not fall as expected.

The BoE’s decision was in line with market expectations, but some analysts had speculated that the BoE might raise rates again this month to signal its determination to fight inflation.

BoE downgrades growth forecasts

Alongside the interest rate decision, the BoE published its quarterly Inflation Report, which contained a bleak assessment of the UK’s economic prospects. The BoE slashed its growth forecasts for the next three years, predicting that the economy will stagnate from now until 2025.

The BoE said that the UK economy had been hit by a combination of factors, including:

  • The ongoing effects of the Covid-19 pandemic, which have reduced consumer confidence and spending, disrupted supply chains and labour markets, and increased health risks and uncertainty.
  • The adjustment to the new trading arrangements with the European Union after Brexit, which have increased costs and frictions for businesses and households.
  • The tightening of monetary policy, which has increased borrowing costs and dampened demand.

The BoE said that these factors have created a “material drag” on the economy’s potential output and productivity growth. The BoE also said that there are “downside risks” to its forecasts, such as a possible resurgence of the virus, further supply shocks or a disorderly rise in global interest rates.

BoE expects inflation to peak soon

The BoE said that inflation, which rose to 5.1% in October from 4.2% in September, is likely to peak at around 5.5% in the first quarter of next year, before falling back towards its 2% target by the end of 2023. The BoE attributed the surge in inflation to temporary factors, such as higher energy prices, global supply bottlenecks and post-pandemic adjustments in demand and costs.

However, the BoE also acknowledged that there are “upside risks” to its inflation outlook, such as stronger wage growth, higher inflation expectations or persistent supply disruptions. The BoE said that it will monitor these risks closely and take “whatever action is necessary” to bring inflation back to target.

The BoE’s inflation forecast is more optimistic than some other forecasts, such as those from the International Monetary Fund (IMF) or the Office for Budget Responsibility (OBR), which have warned that inflation could remain above 4% until late 2024 or early 2025.

BoE faces a difficult balancing act

The BoE’s latest report highlights the challenges that it faces in steering the UK economy through a period of high inflation and low growth. The BoE has to balance the need to keep inflation under control with the risk of harming the fragile recovery by raising interest rates too much or too fast.

The BoE’s governor, Andrew Bailey, said that the MPC’s decisions are “not straightforward” and that there is “no simple formula” for setting interest rates. He said that the MPC has to weigh up various factors and uncertainties and make “judgement calls” based on the best available evidence.

Bailey also said that the MPC is not influenced by political considerations or pressures and that it acts independently and transparently in pursuit of its statutory objectives. He said that the MPC’s credibility and accountability depend on its ability to deliver stable prices and support economic growth.

By Kane Wilson

Kane Wilson, founder of this news website, is a seasoned news editor renowned for his analytical skills and meticulous approach to storytelling. His journey in journalism began as a local reporter, and he quickly climbed the ranks due to his talent for unearthing compelling stories. Kane completed his Master’s degree in Media Studies from Northwestern University and spent several years in broadcast journalism prior to co-founding this platform. His dedication to delivering unbiased news and ability to present complex issues in an easily digestible format make him an influential voice in the industry.

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