Bank of England set to push UK 'into recession'

Economists predict interest rate rising to 5.7% inducing a year-long recession ahead of Christmas

Pedro Goncalves
·Finance Reporter, Yahoo Finance UK
Updated 2 min read
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A view of the Bank of England as it is poised to raise interest rates for the 13th time in a row after disappointing inflation figures showed price rises have not eased. Picture date: Thursday June 22, 2023.
The Bank of England will push the UK into recession this year if it raises rates to 5.75% by November, economists predict. Photo: PA/Alamy (Aaron Chown, PA Images)

The Bank of England (BoE) will push the UK into recession by the end of the year in its battle to curb inflation, according to Bloomberg Economics.

A year-long recession will hit Britain in the final three months of the year assuming the BoE raises interest rates to 5.75% by November, economists Dan Hanson and Ana Andrade from Bloomberg Economics said.

This would be a shallow recession, wiping out just over 1% of economic output, in the run-up to the next election.

“The risk is the data continues to prove unresponsive to the BoE’s actions and interest rates rise further than our baseline.

Read more: Interest Rates: Why the Bank of England may have to create a recession

“As borrowing costs move above 5%, we think the risk of a financial stability shock increases exponentially,” Hanson and Andrade said.

Bloomberg Economics now forecasts that the UK economy will grow just 0.1% this year and shrink 1% in 2024, a sharp revision from the 0.3% growth previously estimated.

That assumes the BoE raises rates to 5.75% by November from the current 5%. However, markets are almost fully pricing in 6.25% by December, raising the possibility of a far worse slump.

“The big risk to our forecast is that the BoE tightens by more than we have assume,” they said. “In a world where it followed market expectations, which is about 100 bps higher on average over the next three years compared to our forecast, we would expect the economy to be about 1% smaller by 4Q25 with a deeper recession.

Read more: Bank of England hikes UK interest rates to 5% to combat inflation

“What that estimate could easily miss is the possibility that the lags from past tightening are longer than we have assumed or that high rates create financial instability. Should either of those scenarios play out, the recession would be significantly deeper.”

The rate of inflation in the UK remains at 8.7%.

Last week, the BoE raised interest rates again to a 15-year high, from 4.5% to 5%, to try to bring inflation under control.

Watch: Banks aren't passing interest rate hikes on to savers fast enough, chancellor warns

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