To control rising inflation in the United Kingdom, the Bank of England has increased the interest rate to 3% from the current 2.25%. This is the biggest ever increase in interest rate in 33 years.
The country’s central bank has also asked citizens to face the longest recession in the history of the European nation. A hike in interest rates is set to take UK lending rates to their highest level since the 2008 financial crisis, BBC reports.
Prices in the UK are rising at their fastest pace in the past four decades, fueled by the COVID-19 pandemic and then the Russo-Ukraine war. Interest rates have been rising since December last year due to measures taken by the central bank to check inflation. Consumer price inflation in the UK returned to a 40-year high in September.
As a result of increase in interest rates, loans become costlier which leads to less spending by consumers on houses, cars, land and other properties.
The move by the Bank of England is likely to be welcomed by many, who are set to reap greater rewards on their deposits in the bank. However, it is likely to burn a huge hole in the pockets of those who have outstanding payments on their mortgage, home loan, credit card debt and other borrowings.
Recession occurs when a country’s economy shrinks for two consecutive quarters. The unemployment rate climbs during recessions, and people’s wages often drop as companies make less profit because of less demand.
The Bank of England has said the economy has already entered a “challenging” recession. This is expected to continue in 2023 and again in the first half of 2024.
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