The latest Chancellor of the Exchequer, Jeremy Hunt, has warned us that the interest rate may need to increase to 5% over the next few months to combat rising inflation. Interest rates, however, have already been raised from 2.25% to 3% – the eighth consecutive increase since December 2021 and the highest level since November 2008.
As of September it seems the Bank of England already revealed that Britain is in a recession as GDP falls and interest rates are their highest in over a decade – but what is a recession and is the UK truly in one? Here’s what you should know.
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.
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?
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.
Recently, the bank warned us that we are facing our longest recession “since records began” as interest rates have been raised higher than anything seen in 33 years. They said it will be a “very challenging” two-year slump with unemployment almost doubling by 2025.
According to a report by The Times, however: “It is not expected to be as deep as the downturn that followed the financial crisis of 2008.”
When was the UK last in a recession?
Our last recession fell during the height of the Covid-19 pandemic in August 2020, following an extensive lockdown with shops and other venues being closed seeing hundreds of companies going out of business. Overall, the UK’s GDP fell by a staggering 20.4% as many people lost their jobs or were furloughed for long periods of time.
Before this, the UK had a recession in 2009 after the economic crisis of 2008 – GDP fell by 7% then and the situation did not ‘end’ until the final quarter of 2009.
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.
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 could 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.
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.