Britain is at “risk of an unnecessary recession” if the Bank of England fails to slash interest rates fast enough, experts are warning.
Households in the UK have been saddled with high mortgage and debt repayments following the Bank of England’s decision to raise the country’s base rate.
The central bank hiked interest rates multiple times in the last 18 months to try to rein in the Consumer Price Index (CPI) rate of inflation.
With inflation easing to 3.9 per cent, analysts are forecasting rate reductions later in the year but some are concerned the Bank’s tightening is being “reversed too slowly”.
Experts are warning that Britain could be hit with an 'unnecessary recession'
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A recession is defined as happening when a country experiences two consecutive quarters of negative growth.
While the UK has so far avoided this in 2023, experts are concerned that keeping interest rates high may trigger a recession.
According to Tom Stevenson, the investment director for Personal Investing at Fidelity International, the recent gross domestic product (GDP) figures for October 2023 may be a harbinger of further economic turmoil.
The UK economy dropped by 0.3 per cent for the month compared to a 0.2 per cent rise in September 2023.
Mr Stevenson believes negative GDP growth combined with the fallout of high interest rates will be a headache for Britons.
He explained: “That built on other recent signs of weakness in the UK economy, including a slowing in the rate of wage growth and a retreat in the inflation rate from a peak of 11.1 per cent to 3.9 per cent.
“The Bank of England itself has warned that nearly a million homeowners face a £500 a month mortgage hike by 2026 as fixed rate deals reprice."
The investing expert noted that the inflation remains higher than the Bank of England’s desired two per cent target.
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The Bank of England will likely not cut rates until later in 2024
PAAs such, the central bank could be hesitant to slash rates immediately until the CPI rate eases even further.
Mr Stevenson added: “Central banks know that they cannot wait for prices to fall back fully before easing monetary policy.
“The lag between cuts in interest rates and their impact on the economy raises the risk of an unnecessary recession if policy tightening is reversed too slowly.”
The Bank of England’s Monetary Policy Committee (MPC) is next set to provide an update on interest rates on February 2, 2024.