BOE urged to pause rate hikes amid recession fears

The Bank of England faced calls to halt its interest rate hikes following a setback in the summer that raised concerns of a possible recession. Official data revealed a 0.5 percent contraction in GDP for July, significantly worse than the predicted 0.2 percent decline. The slump was attributed to factors such as strikes by doctors and teachers, along with adverse weather conditions.

Goldman Sachs, the US investment bank, revised its UK growth forecast downward in response to this report, which added to mounting evidence of the adverse effects of interest rate hikes on households and the broader economy. Separate data revealed that mortgage arrears reached their highest level since 2016.

Since December 2021, interest rates have been raised 14 times as part of the Bank of England's efforts to combat inflation, with expectations of another increase to 5.5 percent in the coming week.

The Institute of Directors advocated for the preservation of the current interest rates, underscoring the importance of granting the Bank sufficient time to observe the effects of its measures, rather than the potential consequences of overaggressive adjustments. Similarly, the Institute of Chartered Accountants in England and Wales, voiced apprehension over the potential negative repercussions of excessive rate increases on the economy, considering the substantial time gap between rate hikes and their actual influence on the real economy.

Meanwhile the Bank of England governor Andrew Bailey hinted that interest rates were approaching their peak but acknowledged potential disagreements among the Bank's rate-setters regarding how far to proceed. Some members advocated for patience, as the negative consequences of previous rate hikes are still unfolding, while others argued that allowing inflation to spiral out of control poses a greater risk.

Official data showed July's GDP contracted by 0.5%, surpassing the anticipated 0.2% decline.

The July GDP data, published by the Office for National Statistics (ONS), followed a 0.5 percent growth in June. Despite July's setback, the ONS noted a positive overall trend, with a 0.2 percent growth in GDP over the three months to July. The figures indicated that industrial action by NHS, teaching, and rail staff, coupled with unusually wet weather, impacted sectors such as retail, construction, and summer campsites.

While some experts voiced concerns about a potential recession and suggested that the rapid slowdown could be a harbinger of an impending recession, others believe while another rate hike is likely, the GDP reading supports the case for the Bank to assess the extent of weakened demand before taking further action.

Goldman Sachs revised its GDP growth outlook for the year from 0.5 percent to 0.3 percent in response to the new data. However, not all pundits interpreted July's setback as the start of a sustained downturn. Leading economists in the country expressed skepticism, attributing July's decline to specific, non-recurring factors.

Meanwhile Chancellor Jeremy Hunt remained optimistic about the future, citing the UK's rapid recovery from the pandemic compared to other G7 nations. In contrast, shadow chancellor Rachel Reeves characterized it as "another dismal day for growth."

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