We’re staring down the barrel of a very long recession

James Moore, The Independent

The Bank of England’s latest missive reads like a horror story written in the traditionally bland language of economics. The headline is obviously the decision to increase interest rates by 0.75 percentage points to 3 per cent by the rate-setting Monetary Policy Committee (MPC).

The last time they were this high was in November 2008. It’s more than 30 years since we have had an increase of this magnitude. The vote, however, was split. In the end, it went 7-2. The dissidents were newbie Swati Dhingra, who undercut the rest of the committee in her first meeting by plumping for a 0.5 percentage-point rise this time, and Silvana Tenreyro. She clearly decided no one was stealing her crown as the MPC’s dove in chief, favouring an increase of just 0.25 percentage points. The borrowers’ best pals, then?

It has become a bit easier lately for those looking to either remortgage when their fixed-rate deals come to an end or take out new loans. The damage done by Liz Truss and Kwasi Kwarteng when they dragged the nation into a grim right-wing fever dream has unwound, to some extent.

Fixed-rate deals are priced based on market expectations for rates. They’ve come down a lot. The current market view is that they’ll peak at around 4.5 per cent. Under Truss, people were talking about 6.25 per cent and perhaps even more. But that’s not much comfort. That unpleasant word “repossession” is starting to slip back into the housing market lexicon.

Dhingra and Tenreyro both justified their dovish stances in similar ways. To paraphrase: the UK economy is looking decidedly shaky. We’ve kicked it a lot with the rises we’ve already imposed. Perhaps we should wait a bit and see how things move before bringing the hammer down again.

Their colleagues, however, were unmoved. Inflation is expected to top 11 per cent, and BoE governor Andrew Bailey warned of “upside risks” at the MPC’s press conference. Translation: if we’ve got it wrong with our forecasts, we’ve probably underestimated how bad it might get. There was a clear warning that more rate rises are on the way. The economy is just going to have to take one for the team.

For what it’s worth, I think the MPC’s majority is right, for all that their decision will cause a lot of pain. The government’s energy support package will reduce the peak of inflation and arithmetic will force the number down sometime next year because the recent energy price rises will have worked their way through the system by then. Inflation is, remember, calculated as a percentage, comparing this year’s prices to last year’s.

However, the MPC is clearly still worried — and it is right to be. It isn’t just the price of energy that is causing a problem. Inflation can be very hard to get rid of if it becomes entrenched. It has, nonetheless, actually proven to be quite dovish as a body. Central banks tend to move in packs and, while the Bank of England moved with the pack this time, it has undershot its global peers on previous occasions.

The markets think rates will peak at around 4.5 per cent. The BoE has been guiding them down, and there was more of the same at Bailey’s press conference. This decision was also taken before the fiscal squeeze that’s coming from chancellor Jeremy Hunt. Truss and Kwarteng thought they could give UK plc a sugar rush by cutting taxes for the wealthy. Hunt is going to do the opposite.

Brace yourself, because we’re in for a long recession. A very long recession. A near two-year slump if the BoE is right. It is at least expected to be shallow, but that doesn’t offer much in the way of comfort. The current thinking is that unemployment still doubles from its very low level (3.4 per cent) — although, again, previous downturns have seen much higher levels of joblessness.