# The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-11-22 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: BoE's Latest Rate Hike Underscores UK’s Economic Woes Meta Description: Gain insights from Kavan Choksi on BoE's latest rate increase and the impact on UK's economy, inflation, and future monetary policies. URL: https://financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallouthtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-10-17t094607z1lynxmpei9g0cbrtroptp4britain-pensions-regulator-1736814834488-compressed.jpg) ![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/kavan-choksi-450x335-1736814834397-compressed.jpg) _By_ **_Kavan Choksi,_** _successful investor, business [management consultant and wealth](https://www.financedigest.com/wealth-management-consultant.html "Wealth management consultant") advisor._ **BoE’s Latest [Rate Hike Underscores UK’s Sticky Economic](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") Woes** Earlier this month, the [Bank of England](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure") (BoE) raised its target rate three-quarters of a percentage point, to 3.0%, the eighth straight rate increase set by the UK’s central bank in its effort to tamp down soaring inflation, and the largest rate hike of the nearly year-long cycle. Consumer [price inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc-2.html "UK shop price inflation hits record 8% in January: BRC") in the UK has reached 10%, with households feeling an even greater pinch as energy and groceries have risen by even more. The array of economic shocks that the UK has suffered since the [BoE began raising rates](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") (from 0.1% last December) has been staggering, according to BoE Governor Andrew Bailey. Noting the post-pandemic supply chain issues, which created global inflationary pressures, as well as Russia’s invasion of Ukraine that resulted in an outsized effect on energy costs in Europe, [Bailey reaffirmed BoE’s critical role in reducing inflation:](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") “If we don’t act now, it will get worse.” Beyond the global shocks, BoE also acknowledged that the UK faces its own cyclical and structural pressures, such as the shrinkage in the UK labor force, a [key area of focus in setting rate](https://www.financedigest.com/morgan-stanley-others-now-forecast-4-peak-for-key-ecb-rate.html "Morgan Stanley, others now forecast 4% peak for key ECB rate") policy. A volatile political environment that has led to fiscal missteps from the government has also [caused economic damage](https://www.financedigest.com/flood-most-damaging-peril-of-2016-causing-nearly-one-third-of-210bn-global-economic-losses-according-to-aon-catastrophe-report.html "Flood most damaging peril of 2016, causing nearly one-third of 0bn global economic losses – according to Aon catastrophe report") that must be cured, though the scale of that damage in isolation is impossible to quantify. While the gilt market has stabilized since the [announced “mini-budget,” the markets remain](https://www.financedigest.com/barclays-announces-sale-of-remaining-shares-in-south-africas-absa.html "Barclays announces sale of remaining shares in South Africa’s Absa") febrile with some remaining pockets of illiquidity. Future fiscal policies will likely [impact inflation](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank"). The government, for instance, has announced that the household [energy cap](https://www.financedigest.com/belgium-supports-energy-price-caps-suspending-trading-in-eu-power-crunch.html "Belgium supports energy price caps, suspending trading in EU power crunch") will be tapered more quickly than planned. The details of the program changes have not been crystallized, as the impact on household energy [costs hangs in the balance](https://www.financedigest.com/can-cfos-balance-the-books-with-rising-operating-costs.html "Can CFOs balance the books with rising operating costs?"). **[Future Rates:](https://www.financedigest.com/bank-of-england-officials-split-over-future-path-for-rates.html "Bank of England officials split over future path for rates") (Maybe) Not as Severe as Expected** Amid these headwinds, [markets have priced in future rate](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets") increases of up to a 5.25% benchmark rate. While BoE predicts that future [rate hikes](https://www.financedigest.com/wall-street-slips-dollar-gains-as-fed-seen-hiking-rates-in-may.html "Wall Street slips, dollar gains as Fed seen hiking rates in May") will be needed, its November report suggests that a rate below current market projections may be sufficient to return inflation to near-target, sustainable levels. As markets digest the BoE’s forecasts, mortgage [rates may fall](https://www.financedigest.com/shares-fall-with-oil-prices-amid-concerns-about-u-s-fed-rate-hikes.html "Shares fall with oil prices amid concerns about U.S. Fed rate hikes") in the short term, some welcome news for borrowers priced out of the real estate market. With a higher level of predictability from BoE policy, lenders can price less [risk into mortgage](https://www.financedigest.com/aon-assists-freddie-mac-to-reach-5bn-risk-transfer-milestone-for-u-s-mortgage-credit-business.html "AON ASSISTS FREDDIE MAC TO REACH BN RISK TRANSFER MILESTONE FOR U.S. MORTGAGE CREDIT BUSINESS") rates. As the market curve decreases in [line with BoE](https://www.financedigest.com/boe-set-to-walk-the-line-between-inflation-and-recession.html "BoE set to walk the line between inflation and recession") projections, rates may eventually begin to decrease. However, the last year of widening spreads in the mortgage [market demonstrates how compressed mortgage rates](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes") have become since 2008, and there may be more compression yet to work out. Additionally, the BoE’s forecast does indicate an ongoing [risk that inflation](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") surprises on the upside, requiring more aggressive action. Recent upside surprises on wages, for instance, led in part to the more aggressive [rate hike](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike") in November, as wages create second-order effects on consumer prices. **A Contracting Economy in 2023** The BoE has forecast a UK recession since August 2022, noting that the UK economy and growth prospects differ from the US, [where](https://www.financedigest.com/stocks-dollar-gain-on-soft-landing-hopes.html "Stocks, dollar gain on soft landing hopes") predictions of a recession or “soft landing” are still somewhat nebulous. The UK simply faces too many obstacles, including the [rising costs of energy](https://www.financedigest.com/factbox-how-far-are-uk-energy-bills-set-to-rise-and-what-help-are-consumers-getting.html "Factbox-How far are UK energy bills set to rise and what help are consumers getting?") imports, that will lead to GDP weakness. Governor Bailey predicts that [inflation will decrease in about six months](https://www.financedigest.com/inflation-in-key-german-states-eases-for-second-month.html "Inflation in key German states eases for second month"), and when it does decline, it may do so quickly. But the recession may [last much longer](https://www.financedigest.com/brand-loyal-brits-have-longer-relationships-with-their-car-than-their-last-lover.html "BRAND-LOYAL-BRITS HAVE LONGER RELATIONSHIPS WITH THEIR CAR THAN THEIR LAST LOVER"), slowly trending towards growth. The impact of the contraction will most likely lead to some weakness in the labor market, with unemployment [expected to reach 6.5% before the economy](https://www.financedigest.com/german-economy-expected-to-skirt-recession-economy-ministry-report.html "German economy expected to skirt recession – economy ministry report") begins growing again. In all, the UK [remains stuck in a difficult economic](https://www.financedigest.com/german-economic-growth-to-remain-muted-in-near-term-imf.html "German economic growth to remain muted in near term – IMF") position, with more pain for UK households on the horizon. But a little more clarity on future [rate hikes](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike") from the BoE has provided some indication of when inflation may ease, allowing UK markets and households to better plan for the long winter ahead. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---