The Bank of England has raised concerns about the stagnation of the British economy over the next three years as it increases the official UK interest rates to 5.25% in an attempt to combat inflation. The central bank predicts that inflation in Britain will decrease from just under 8% in June to 5% by the end of the year, but it will remain well above the target rate of 2% for a considerable period of time. Despite raising interest rates above the levels imposed by the European Central Bank, British inflation continues to rise higher than in many other European countries. In July, inflation across the eurozone stood at 5.3%, with Germany at 6.5%, France at 5%, Ireland at 4.6%, and Spain at 2.1%.
The Bank of England’s latest report acknowledges the impact of sharp increases in food, energy, and other import prices over the past two years, which have had second-round effects on domestic prices and wages. The report also highlights the tight labor market in the UK as a contributing factor to future inflation, but it does not explicitly reference the consequences of Brexit. The bank predicts that British inflation will return to its 2% target rate by 2025, indicating that interest rates will remain high for an extended period.
The Bank of England’s projections for British economic growth in the next three years are relatively weak. It anticipates a growth rate of 0.8% this year, followed by only 0.3% in both 2024 and 2025. The growth rate is expected to slightly accelerate to 1.1% in 2026. The report attributes the sluggish growth to the impact of the pandemic, weak potential supply, and diminishing fiscal stimulus.
Compared to previous projections, the bank expects quarterly GDP growth to be lower throughout the forecast period, particularly in 2024 and early 2025. The increase in the Bank of England’s key rate to 5.25% suggests that UK banks will raise their mortgage interest rates to over 6%. However, economists argue that while households with tracker mortgages will be immediately affected, many British households with long-term fixed loans will not have to refinance their loans at significantly higher rates this year. Nevertheless, if the Bank of England maintains higher interest rates for an extended period, it will eventually impact a significant number of households in the coming years.
In conclusion, the Bank of England’s decision to raise interest rates reflects concerns about the stagnation of the British economy and the persistent inflationary pressures. While the central bank expects inflation to gradually decrease, it anticipates a prolonged period of elevated interest rates. The projections for economic growth are modest, with the impact of the pandemic and weak supply contributing to the sluggish recovery. It remains to be seen how these measures will affect households and businesses in the long run.