The UK has been a financial powder keg since before the coronavirus pandemic erupted in 2020. Indeed, it never truly recovered from the banking crisis and recession 2008, after which a newly-elected Conservative government embarked on a decade-long austerity project which, some say, deepened the holes in the nation’s finances.
Today, though, things are bleaker than they have been in generations. Numerous factors have led to a present economic environment wherein household goods have been rendered expensive, property prices are facing a precipitous fall and mortgages are less affordable than they have been for decades. The latter results from the Bank of England’s efforts to curb rising inflation, by raising interest rates – and doing so by their highest increments in history. But why did they do this, and are more interest rate rises on the cards for 2024?
The Current Economic Environment
To expand on the present economic environment, we must first look back to the beginnings of what is now called the ‘cost-of-living crisis’. Early warning signs came with the swift rise of wholesale energy prices towards the end of 2021, initially attributed to instability in Russia and Ukraine but more tangibly related to the UK’s withdrawal from the EU. Continued barriers to trade saw the price of other goods begin to inflate alongside energy, leading to a steeply rising CPI (Consumer Price Index) and an official inflation-led crisis.
In 2022, the situation was worsened by Liz Truss’ brief tenure as Prime Minister. Her public policy announcements were dangerously inflationary in nature, precipitating a slump of the pound sterling against the dollar and forcing further rises to the CPI. The Bank of England (BoE) was instrumental in attempting to control this.
BoE Monetary Policy
The BoE controls interest rates via its Monetary Policy Committee; rising interest rates is a calculated move designed to slow the financial markets, reducing the amount borrowed and spent in order to hamper inflationary decision-making. In 2022, interest rates rose by their highest margin in history, and in August this year voted for a 14th consecutive rise. Further rises, albeit by smaller increments, are not out of the question, as interest rates are expected to remain high for at least two more years.
Potential Implications for Households
The potential for further rises, however slim, could have a number of direct and indirect consequences for households across the country. While there are negative consequences, as seen above, there are also positive ones; rising interest rates enable households to generate more interest from their savings, for example.
Of course, the prevailing implications are negative and relate to the housing market. Interest rate rises are designed to disincentivise borrowing, and as such would make borrowing for property even harder than it is presently. It is for this reason, partially, that the BoE is exercising caution with regard to further rises. The property market is in a delicate enough state, and more punitive rises could see major disenfranchisement.
