WARNING: Interest rates to stay higher for longer with recession forecast – claim
Schroders is forecasting recession and says that the surprise 0.5% hike in Base Rate suggests the Bank of England is far from getting on top of inflation.
The Governor of the Bank of England Andrew Bailey has hinted that interest rates may stay higher for longer than expected, because inflation has proved to be such a persistent problem.
Speaking at a European Central Bank conference in Portugal Bailey suggested that markets were wrong to think rates would fall quickly from a peak reached around the end of this year.
INFLATION
During the same event, he said that the UK labour market and not Brexit is to blame for stubbornly high inflation.
Meanwhile Azad Zangana, Senior European Economist and Strategist, at investment manager Schroders, reckons that the events of the past few weeks, incoming data and the surprise 0.5% rise in the base rate suggests that the Bank of England (main picture) remains far from getting on top of inflation.
He says: “Consequently, we now anticipate interest rates to peak at 6.5% by the end of 2023, a full 1.5% higher than our previous forecast for a peak of 5%.
“This is one of the highest forecasts in the market and we anticipate rates at this level will drive the UK economy into a recession.”
Schroders now forecasts that the Bank of England will raise rates by 50 basis points (bps) in August and September, before slowing to 25 bps increments in November and December.
WAIT AND SEE
Zangana adds: “Unfortunately, the Bank of England is no longer able to wait and see how the interest rate rises so far will affect the economy.
“We also cannot rule out that the path the bank seems now to find itself on, with the potential to disproportionately impact the housing market, will not result in financial stability issues.
“The current level of UK GDP remains below where it was in September 2022, and so while the country has avoided a technical recession (two consecutive quarters of contraction), the environment is already fairly recessionary.
“The increase in interest rates we now anticipate is likely to be felt by the end of 2023, and we forecast a recession to follow between Q4 2023 and Q2 2024, with a total fall in GDP of 0.6%.”
So Andrew Bailey suggests the inflation rate problem is due to the UK labour market and not Brexit? What has created this tight labour market then. I am worried we have a Governor who cant put cause and effect together beyond 1 link.
The housing market is now offcially a carbon fibre sub.