"UK: Recession Expected if Base Interest Rate Reaches 6%"

The Bank of England (BOE) has been analyzed to potentially push the UK economy into a recession if it raises the base interest rate into the 6% range as the market expects.

On the 20th (local time), Bloomberg Economics predicted that the UK's gross domestic product (GDP) growth rate will be -0.3% this year and -1.4% next year. This forecast suggests that if the BOE, which has tightened monetary policy at the fastest pace in 40 years, raises the base rate by more than 1.5 percentage points from the current 4.5%, the UK will enter a recession by the end of this year.

[Image source=Reuters Yonhap News]

Dan Hanson, an analyst at Bloomberg Economics, pointed out, "UK inflation is at an excessive level," adding, "What the tightening cycle has taught us is that inflation should not be underestimated." He further stated, "The BOE will have no choice but to endure a recession for a considerable period to prevent high inflation from becoming entrenched."

Price stability in the UK is not smooth. On this day, the UK Office for National Statistics reported that the consumer price inflation rate for May increased by 8.7% year-on-year. This matched the previous month's rate (8.7%) and exceeded market expectations (8.4%).

The UK's inflation rate has surpassed market expectations for four consecutive months. The core CPI inflation rate, which excludes volatile energy and food prices, also rose to 7.1% from 6.8% the previous month, marking the highest level since March 1992. Since August last year (10.1%), UK inflation had been in double digits, but it fell to single digits in May (8.7%), although the pace of deceleration is slowing.

Following the release of the inflation data, the market reaffirmed its existing forecast that the UK's terminal interest rate will reach the 6% range. Reflecting the slower pace of inflation deceleration and additional tightening, the BOE is expected to raise the base rate by 0.25 percentage points on the 22nd, lifting it from the current 4.25% to 4.75%.

Bloomberg stated, "The UK is expected to reach a 6% interest rate by February next year," adding, "In this case, the UK economy will face massive job losses, and the BOE will have no choice but to induce a recession to stabilize the sluggish inflation."

[Image source=EPA Yonhap News]

The UK's consumer price inflation rate in May was higher than other major countries such as France (6.0%), Germany (6.3%), the EU (7.1%), and the United States (2.7%). The slow pace of inflation deceleration in the UK is attributed to cost increases caused by restricted movement of people and goods with the European Union (EU) after Brexit, rising energy costs during the process of reducing dependence on Russia, pound depreciation due to political risks, and reduced household consumption due to rising mortgage rates.

The International Monetary Fund (IMF) predicted that the UK is the only country among the Group of Seven (G7) to enter a recession this year, and the BOE also became the first advanced economy to revise its growth forecast to -1.5% for this year, indicating negative growth.

This content was produced with the assistance of AI translation services.