Chancellor Jeremy Hunt’s recent remarks about interest rates and the recession have had some strong responses from different audiences. The fact that Hunt is comfortable with sky-high interest rates leading to a recession has concerned voters and backbenchers despite intending to calm the anxious public. Despite narrowly avoiding a recession due to soaring inflation, could we be heading for one anyway?
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Easing fears
According to Hunt, “…inflation is a source of instability. If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”
The goal of this statement was to ease the fears of an anxious City, reassure the markets, and prevent any disorderly conditions. But where does this fear come from? After the brief stint under Liz Truss, people are worried about the desire to avoid short-term, popular choices that neglect borrowing costs and rising prices. By Hunt conveying a willingness to accept economic contraction in order to control inflation, he hopes to calm the markets.
Current conditions rocking the boat
Unfortunately, the recent inflation spike has sparked turmoil as April’s price increase exceeded expectations. Core inflation is expected to continue to rise, influenced by pay growth. These factors have caused concern that the Bank of England will yet again raise interest rates and will soon surge to 5.5% in the near future. While many believe that another hike is necessary to kerb inflation and protect living standards, it does carry the risk of hampering economic growth.
New Predictions
As a result of the discord, economists have revised their predictions for a chance of a recession, up to 66% from the usual 40%. The economy is expected to enter a downturn in the second half of this year and the beginning of the next, with the housing construction industry being hit the hardest.
Unfortunately, it seems that attempts to tame inflation through higher interest rates could actually do some serious damage to banks and the economy, eventually leading to financial turmoil.
If you need to talk with an expert about the impact of the potential changes in the economy coming up, don’t hesitate to reach out to your trusted Dental & Medical Financial Services adviser.