Explained: What is a recession? Is the UK in a recession now? What does that mean for you?

The Bank of England said it anticipates a 0.1 per cent fall in GDP over this current quarter, supporting the idea that the UK is in a recession, but what does this mean?

The Bank of England originally projected that the economy would grow in the current financial quarter but has since said it predicts gross domestic product (GDP) to drop by 0.1%.

The Central Bank announced it will increase interest rates again, which have jumped from 0.5% to 1.75-2.25%, making for their highest rates in over 13 years.

This latest increase comes as the Bank contends with soaring inflation in the UK which is at 9.9% currently after being 10.1% last month, just off the cusp of the 40-year high.

The Bank of England, in the City of London.

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This is largely attributed to the cost of living crisis which has seen skyrocketing energy prices, for which the ‘mini budget’ was announced today in the House of Commons.

What is a recession?

In broad terms, a recession is any period in which there is a temporary economic decline, usually due to a reduction in trade or industrial activity.

In the UK, a recession is when GDP falls in two successive quarters.

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Chancellor of the Exchequer Kwasi Kwarteng delivers his mini-budget in the House of Commons, London.

GDP is the total market value of finished consumer goods or services produced within a country over a specific period of time.

According to the Bank of England website, it is a “measure of the size and health of a country’s economy,” which is also used to compare different economies over different periods.

Is the UK in a recession now?

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During the second quarter the UK’s GDP fell by 0.2%. The Bank of England predicted a further drop by 0.1% in the third quarter, if this prediction turns out to be true then the UK is in a recession.

During a meeting in August, the Bank of England also warned that inflation could peak at 13.3% meaning that the UK would experience five successive quarters of this recession.

Chancellor Kwasi Kwarteng of the Central Bank’s Monetary Policy Committee (MPC) - the branch responsible for assessing interest rates - mentioned a “growth plan” last Friday that could counteract the economic downturn.

As of today, September 23, Kwarteng announced that the highest rate of income tax would be abolished, and the basic rate was to be cut to 19% by next April in a bid to foster economic growth.

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Why do interest rates matter?

According to the Bank of England website, interest rates are percentages that account for “the cost of borrowing money or the reward for saving.”

For example, the interest rate of your bank account means you are paid interest e.g., if you open an account with £100 and your interest rate is 1%, after one year you will be paid £1.

Similarly, for mortgages or loans, you would also pay an interest rate to whoever you borrowed money from.

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The Bank of England says: “We use Bank Rate in our dealings with other financial institutions, which influence lots of other interest rates in the economy.

"This includes the various lending and savings rates offered by high street banks and building societies.”

How will rising inflation affect you?

Increased interest rates allow savers to gain more interest than their own savings each month, however if these rates sit well below inflation - as they currently do - people are expected to experience financial losses.

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For cost of living factors like food shopping, the rising cost of borrowing money could see the cost of food pushed up.

Interest rates may also affect renters depending on their circumstances e.g., if landlords want to remortgage at higher rates this may fall onto their tenants to pay more.

Others with tracker mortgages should also see their monthly cost rise according to the interest rate.

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