The Bank of England is urged to stop hiking interest rates as a summer economic setback raises fears of a recession
- Read more: UK slumps into the red with GDP dropping 0.5% in July
The Bank of England was yesterday urged to stop hiking interest rates after a summer economic setback raised recession fears.
Official figures showed GDP shrank by 0.5 per cent in July, with experts blaming doctors’ and teachers’ strikes and the wet weather. They had predicted a 0.2 per cent fall.
US investment bank Goldman Sachs cut its forecast for UK growth this year after the report, which came amid mounting evidence that higher interest rate hikes are squeezing households and the wider economy.
Separate figures published this week showed mortgage arrears at their highest level since 2016.
Interest rates have been hiked 14 times since December 2021, ratcheting up the pain for borrowers as the Bank of England battles to bring down inflation, and they are expected to go up again – to 5.5 per cent – next week.
The Bank of England was yesterday urged to stop hiking interest rates after a summer economic setback raised recession fears (File Photo)
But Kitty Ussher, of the Institute of Directors, said: ‘Today’s data supports our call for the Bank of England to keep interest rates steady next week to give time for its medicine to work rather than risking an overdose.’
Suren Thiru, of the Institute of Chartered Accountants in England and Wales, said: ‘The Bank of England risks damaging our economic prospects further by overshooting on rate hikes, given the long time-lag between rate rises and their effect on the real economy.’
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Bank of England governor Andrew Bailey has hinted that rates were approaching the ‘top of the cycle’.
But the decision on how far to go is likely to provoke splits among the Bank’s nine rate-setters. Some ‘doves’ argue that the painful impact of the hikes are still feeding through to the economy so it is best to wait before going further. However, ‘hawks’ argue that the greater danger would be to allow inflation to run out of control again.
Yesterday’s July GDP data, published by the Office for National Statistics (ONS), came after the economy grew by 0.5 per cent in June. The ONS said the broader picture remained positive, with GDP growing 0.2 per cent in the three months to July.
The figures showed industrial action by NHS staff, teachers and rail workers all took their toll in July. And the damp weather – it was the wettest July since 2009 – hurt the retail and construction sectors as well as summer campsite demand.
Neil Birrell, a fund manager at Premier Miton, said: ‘The speed of the slowdown could be indicating that recession is around the corner.’
Bank of England Governor Andrew Bailey (pictured) has hinted that rates were approaching the ‘top of the cycle’
Ed Monk, of Fidelity International, added: ‘The UK has suffered a blow in its fight to avoid recession this year. Another rate rise looks likely, but today’s GDP reading adds to the Bank’s case for waiting to see how much demand has weakened.’
After the new figures, Goldman Sachs revised its outlook for GDP growth this year from 0.5 per cent down to 0.3 per cent.
But not all experts are convinced that July’s setback marks the beginning of a downturn.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: ‘We doubt that July’s month-to-month drop in GDP marks the start of a falling trend, given that it can be uncontroversially attributed to one-off developments.’
Chancellor Jeremy Hunt said: ‘There are many reasons to be confident about the future.
‘We were among the fastest in the G7 to recover from the pandemic and the IMF have said we will grow faster than Germany, France, and Italy in the long term.’
But shadow chancellor Rachel Reeves said it was ‘another dismal day for growth’.
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