Given the current uncertainty, the Bank of England’s decision to hold interest rates at 3.75% last week was “the only one possible”, said Nils Pratley in The Guardian. “Policymakers are as clueless on the length of the war, and the cost of energy six weeks or six months from now, as stock market investors.” So why did the London bond market throw such a wobbly?

UK borrowing costs soared to their highest level since the 2008 financial crisis on the day after the Bank’s meeting, with the yield on benchmark 10-year gilts surging to 5%, “deepening a three-week long rout”, said the Financial Times. Two-year gilts – the part of the market most sensitive to interest-rate moves – were also pummelled.

Britain has been hit hardest in the global bond sell-off since the outbreak of war, because our dependency on imported energy means spiking oil and gas prices “quickly feed through to broader inflation”. When combined with flatlining growth and rising household borrowing costs, the risk of recession is plain.

‘The spectre of stagnation’

Perhaps last week’s turmoil was “a weird overreaction” to the Bank’s hawkish new tone, said Katie Martin in the same paper – rather than interest rate cuts this year, we are now contemplating hikes. But “the spectre of stagnation stalks the land”. The market has stabilised, but “in aggregate, more than £100 billion has been erased from the market value of UK government bonds in a matter of weeks”, said Stuart Fieldhouse on The Armchair Trader.

“UK rate expectations have been on a remarkable journey in barely a month,” said Chris Beauchamp at IG. “A full 100 basis points rise in rates is now expected for this year.” The bad news for consumers and business is compounded by the implications for the Government of “a fiscal squeeze”. If there’s further escalation in the Middle East, “this may be just the beginning of the crisis”.

The ‘Maradona Effect’

As data on demand weakness becomes evident, the Bank of England won’t want “to compound the damage with higher interest rates”, said Karen Ward of J.P. Morgan in the Financial Times. I suspect it is deploying the “Maradona Effect”, named after the footballing legend whose greatest skill was feinting. Conveying a very hawkish signal about the outlook for rates may obviate the need to actually raise them.

The Bank “faces an acute dilemma”, said Roger Bootle in The Telegraph. As we learnt in 2022, the issue at stake is what happens to inflation after the initial, oil-induced spike. The case for higher rates is to ward off “second-round effects” and stop inflation becoming embedded. “The art of central banking lies partly in not overreacting, but also in not taking action too late.”

The Bank of England today held interest rates at 3.75% and warned of higher-than-expected inflation, as the US-Israel war with Iran delivers a “new shock” to the UK economy.

“War in the Middle East has pushed up global energy prices,” said Bank governor Andrew Bailey. “You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year.”

The direct impact of rising energy prices is likely to add about 0.75% to inflation this autumn, instead of an expected fall. And, if businesses pass their higher costs on to consumers, that could add a further 0.25%. All the signals point to “households and homeowners” suffering “further financial hardship”, if the Iran war does not end soon, said The Times.

What did the commentators say?

Seventy years ago, we had petrol rationing, triggered by the Suez crisis, said Gaby Hinsliff in The Guardian. That’s “ancient history now – or it would be, if it weren’t for what looks increasingly like” America’s “version of Suez”. Yet again, a global superpower is “starting a war it seemingly doesn’t know how to finish, against an enemy it woefully underestimated”.

Oil experts have warned that Britain “could be only weeks away from needing to ration fuel”, if tankers don’t resume sailing through the Strait of Hormuz soon. Other countries are “already being forced into drastic steps”. In Pakistan, schools have been closed and government offices have been put into a four-day week, Vietnam is “urging people to work from home”, and Bangladesh has stationed soldiers at fuel depots.

“The financial impact on the UK from” this war is “yet to fully play out, but the outlook is bleak”, said Rosa Prince on Bloomberg. Donald Trump’s “folly” has “kiboshed” Keir Starmer’s “economic revival”. For a “brief moment”, green shoots emerged, and a path opened up for him “to salvage his beleaguered premiership”, only for “Trump’s addiction to foreign escapades” to crush it.

The Iran crisis could “easily accelerate the death of manufacturing” in Britain if “vicious” energy-price rises last longer than a few weeks, said Ben Marlow in The Telegraph. They could crush “the life out” of our heavy industry, shutting down production lines and mothballing “entire factory complexes”. There is a “real risk of widespread de-industrialisation”.

There is “deep energy-linked frustration” in Europe, too, said the BBC’s Katya Adler. “The knock-on effects” of this Middle East conflict is “awakening ghosts of crises past” when Russia’s full-scale invasion of Ukraine rocked the EU’s energy market. Europe has since ended its reliance on Russian gas and oil but it now depends heavily on the US and Norway for energy provision – “which won’t solve its problem with energy security” and won’t shield it from the current price spikes.

What next?

I see a “similar financial anxiety” in the UK as when Russia invaded Ukraine four years ago, said Albert Toth in The Independent. “And that had a long-standing impact on the cost of living.” Volatility in the oil market directly impacts household finances in various ways, some of them more “subtle” than others. People will expect energy bills and petrol prices to go up but “less obvious” will be the rising cost of food, pushed up by increasing transport costs and disrupted fertiliser supply chains.

For Starmer, dealing with Trump’s demands for military back-up may be difficult, but managing the “war’s economic blow is trickier”, said Bloomberg’s Prince. He may as well blame the US president for “sending Britain’s cost of living spiralling”. This week, he announced £53 million in support for low-income households who are most exposed to the sharp increase in heating-oil prices but his government “will need a much bigger package if the conflict drags on”. And “that won’t be easy, given existing strains on the public purse”.

The Bank of England’s decision to jettison historical figures, like Winston Churchill, from its banknotes and feature British wildlife instead has caused quite a stir.

The design change follows a public consultation during which animals and birds emerged as the most popular image choice. But critics are lining up to register their horror. Tory leader Kemi Badenoch accused the Bank of “erasing our history”, and an audience member on BBC’s “Question Time” said it was “surrendering to the radical left”.

‘Values under attack’

“For more than 50 years, we’ve chosen to honour our greatest citizens” on our banknotes, in tribute to their “genius, courage and creativity”, said Conservative MP Tom Tugendhat in The Telegraph. Swapping them for “badgers, puffins and red squirrels” shows we now “lack the courage to state publicly who we are”. Erasing Second World War cryptanalyst Alan Turing from the £50 note severs “the link between citizen and story” and suggests “we care less for codebreakers than cuddly carnivores”.

This is “not a neutral act”, said James Price on City A.M. It’s dangerous to flatten “our visual realm” and “erase the uniqueness of our national story”. Britain feels ever more “like an airport terminal with a welfare state attached”, rather than “a home”. No wonder there’s a backlash: the “penny is dropping that our history and our values are under attack. We should never, never, never surrender them.”

It’s goodbye to the “proud tradition of honouring our greatest Brits”, said Matthew Lynn in The Spectator. “Charles Dickens, George Stephenson, the Duke of Wellington and Elizabeth Fry have all made appearances” on our banknotes over the years; “somehow, a red robin is never going to have the same resonance”. I think the Bank of England “is doing its best to kill off paper money”; certainly, rejecting tradition and favouring what will look “suspiciously like an emoji” will only help.

Silly controversy

I hear the “scoffs and cries of wokery” but I think “the move is a stroke of genius”, said Emily Watkins in The i Paper. “I’ll take a badger over Winston Churchill any day.”

“Our nation is too various to be represented by a handful of dead people stamped on notes – that’s something to be celebrated rather than bemoaned.” There is “no figure in history who can represent, let alone please, everyone”, so, really, the Bank is “saving us all endless grief”. By “representing no one, animals represent us all”.

I can’t think of a sillier public controversy, said Oliver Kamm in The Times. Depicting historical figures on banknotes “is not some hallowed tradition”; it only began in 1970. Presumably, the Bank was not “captured by forces of wokeness” for the 276 years of its existence before then.

Counterfeiters have more “sophisticated printing equipment”, so it is in everybody’s interests that the Bank “thwarts their efforts by regularly changing the appearance” of notes. It is more important to have a paper currency that “commands trust in the corner shop” than one “that bathes us in a patriotic glow”.

The independence of the US Federal Reserve seems ever more at risk as Donald Trump continues to try to influence the central bank’s policies, and has even ordered a criminal investigation into its chair, Jerome Powell.

Since the beginning of his second term, Trump has repeatedly called for Powell to be replaced. He has also attempted to remove board member Lisa Cook, accusing her of mortgage fraud. Trump’s attacks on the Fed have widely been seen as an attempt to “force interest rate cuts out of the central bank, in defiance of its mandate and independence”, said Sky News.

Outside the US, too, there is growing (if more restrained) criticism of the idea of central bank independence. The long-accepted notion that a central bank, unsaddled by political turmoil, is the best vehicle for delivering economic results looks weaker in the face of continuing global instability, swelling deficits and high inflation.

Why is independence important?

The pro-independence argument is that politicians are likely to be “tempted by self-defeating monetary policies” in pursuit of short-term electoral goals, such as decreasing unemployment and “inflating away debts”, said The Economist. Monetary policies that “make everyone better off” in the long run are more attainable and more sustainable if they’re “delegated to a conservative central banker, perhaps even an price-obsessed ‘inflation nutter’”.

The principle that central banks should “enjoy some independence” is certainly not new. In 1806, Napoleon Bonaparte said that the recently created Bank of France should “be sufficiently in the hands of the government”, but “not too much”. But it was really after the Second World War that the modern idea of central-bank independence emerged. In 1951, the “Treasury-Fed accord” gave the US Federal Reserve increased independence and, around the same time, Germany’s Bundesbank was given more autonomy, soon becoming “a model for the rest of the continent”.

Central banks have since been seen as a “triumph of applied economics”. As “independence rose, inflation fell” and “recessions became rarer”. But now this “triumph” is “under threat” in the US and elsewhere.

Why is that changing?

Recent surges in inflation have damaged public trust in central banks and sparked vocal criticism from politicians. The global financial crisis, a prolonged period of quantitative easing, and the “pressures of climate risk, geopolitical shocks and fiscal activism” are further raising the “fundamental” question of whether the “orthodox consensus” has “reached its limits”, said Chatham House.

Independence worked well when most politicians and experts “agreed on what central banks should do to stabilise the economy”, said UnHerd. But that consensus has “disappeared” and “independence without consensus is tyranny”.

Should we be worried?

Trump’s interference with monetary policy “could lead to financial panic and economic disaster” that would be felt around the world, said Bloomberg. A monetary policy dictated by “short-term political calculations” might lead to lower interest rates but would then spark higher inflation and, ultimately, “increase the cost of credit, discourage private investment and make public debt (which, in the US, is already rising unsustainably) harder to service”.

But Trump’s “damaging attacks on the Fed shouldn’t obscure its failures”, said Investors’ Chronicle. “Technocratic policymakers with limited democratic accountability shouldn’t be beyond censure.” The Fed’s recent “rate calls” have “contributed directly to house price and asset bubbles” and its “regulatory failures” in the past “helped lead to the subprime mortgage disaster” and the 2008 crash. Changes to how central banks operate are not “inherently a terrible idea”.

“Labour promised not to increase income tax, not to increase National Insurance and not to increase VAT. Does the prime minister still stand by his promises?” That was Conservative leader Kemi Badenoch’s opening salvo at Prime Minister’s Questions this week.

The answer from Keir Starmer was eyebrow-raisingly non-committal, stating only that the government would “lay out” in the Budget its plans to “build a stronger economy” and “deliver a better future for our country”.

That Budget is still a month away but there are widespread reports that Rachel Reeves is considering a manifesto-busting move to increase the top 45p rate of income tax rate or to lower the threshold at which people have to start paying it.

What did the commentators say?

Come the Budget, the Chancellor faces “a terrible choice”, said Martin Wolf in the Financial Times. Either she must “cut spending that people want and raise taxes that people feel they cannot afford” or she has to “allow explosive rises in public debt”. That, in short, is “the plight of Rachel Reeves”.

With the Office for Budget Responsibility expected to deliver a further £20 billion-plus blow to public finances by downgrading its productivity forecast, the chancellor has limited options. She is under pressure from many within her party to increase spending, rather than cut it, and has already confirmed she will not borrow more to balance the books.

To avoid breaking Labour’s manifesto pledge, Reeves could impose some wholly new taxes. She has been “holding discussions over a raft of” possibilities, said David Maddox and Caitlin Doherty in The Independent. These are said to include a 1% mansion levy on properties worth over £2m, a gambling tax and a bank profits levy. There is also talk of further capital gains reforms, and “ending tax relief on pensions”.

But raising money in this way risks causing “unnecessary amounts of economic damage” and adding “needless complexity to the system”, Isaac Delestre of the Institute for Fiscal Studies think tank, told the paper.

There is a “persuasive case for ignoring the Labour manifesto”, said Adam Smith in The Telegraph. Raising income tax will “demonstrate that the government is serious about getting a grip on public finances” and it will be rewarded by the bond markets with a “multibillion-pound fall in government borrowing costs”. It will “be less damaging to GDP than any further raids on business taxes” and the increased revenues will “help the Bank of England tackle inflation”.

What next?

Economists and Treasury mandarins may be lining up to agree that there’s a “powerful case” for a small income tax rise, said Smith in The Telegraph, but it would be “a misjudgement so grave, it would destroy Reeves’ career and this government”.

“Promises made” must be “promises kept”, said The Guardian’s editorial board. If not, “it will be terrible for politics”, said Lewis Goodall on his Substack. “Backtracking on one of the only promises about which voters might be aware” would mean it’s “game over for the party”.

Breaking the income tax manifesto promise would “come with a colossal political hit”, said the BBC’s political editor Chris Mason. But such is the state of the economy, “some within the party” are telling Reeves “to go for it” anyway.

The Governor of the Bank of England, Andrew Bailey, has softened his sceptical views on the future of stablecoins in the UK, saying it would be wrong to dismiss the cryptocurrency “as a matter of principle”. Writing in the Financial Times, Bailey recognised their potential for “innovation in payments systems” but warned that the new technology “must still answer old central banking questions” to maintain public trust in money, which is “critical” to all economies.

What are stablecoins?

Stablecoin is a form of cryptocurrency, the digital currencies operated by private companies or individuals rather than central banks like the Bank of England (BoE) or the European Central Bank. Crypto, which is currently unregulated in the UK, has seen a major rise in recent years, based on risky “speculative trading”, according to the Financial Conduct Authority.

The most popular and well-known stablecoin is Tether (USDT), with other leading stablecoins including USD Coin (USDC-USD) and Stasis Euro (EURS-USD).

How is it different from other cryptocurrency?

Unlike cryptocurrencies like Bitcoin or Ethereum, which are completely detached from centralised financial institutions, stablecoins are “pegged” to tangible assets, like US dollars, the British pound, or gold prices.

They are designed to hold a steady value, only rarely dipping above or below a designated ratio. For example, a stablecoin with perfect efficiency to the US dollar, would consistently value one “coin” as one dollar. Some stablecoins have a reserve controlled by an algorithm to generate more coins or remove coins according to supply and demand.

Why is the UK government interested in it?

The market for this category of cryptocurrency is already valued at $200 billion (£148 billion) globally. With London responsible for 40% of foreign exchange turnover, the prospect of formal UK participation in stablecoins is an attractive one, according to a report by Innovate Finance.

The attraction of stablecoin is considerable. It bypasses traditional currency conversions, and facilitates “more predictable” and “lower-cost” payments internationally, said Yahoo Finance.

The government is intent on driving forward “developments in blockchain technology”, including stablecoins, Chancellor Rachel Reeves said in her Mansion House speech in July.

The BoE aims to publish a consultation paper, setting out a blueprint for the “UK’s systemic stablecoin regime”, to ensure the UK will “reap the benefits” of the new currency, said Bailey in the FT. The BoE had previously proposed that stablecoin holdings would be capped at as little as £20,000, with no interest offered to customers.

The European Union, Hong Kong, Japan (since 2023) and the United States have all implemented rules to make trading more transparent, a step which has been broadly welcomed by the crypto community.

What are the concerns?

Stablecoins can still be risky, even when pegged to tangible assets. If a stablecoin strays too far from its target value and this cannot be corrected, it can be “depegged”.

On a larger scale, if stablecoins were left unregulated, central banks could be caught on a tightrope. If a stablecoin crashes, the fallout could trigger “fire sales” – rapid sales at significantly low prices due to financial distress – to establish an equilibrium, said Bloomberg.

Conversely, if stablecoins “prove their worth”, allowing users to exchange and store vast sums of money, the “monetary monopoly” of the banks would be undermined.

And as with other cryptocurrencies, an unregulated system can be exploited for illegal activity. Trading is “anonymous, fast and cheap”, making stablecoins highly attractive for criminals to use to conduct scams or launder funds.

The Bank of England's decision to cut its base rate from 4.5% to 4.25% was widely expected, but marks an "important moment for the UK economy", said BBC News.

Rates are "down a full percentage point from their peak" this time last year, and further "gradual and careful" cuts are on the horizon in 2025.

But who stands to gain from the decision, and who will be left counting the cost?

Mortgage payers: winners

An interest rate cut is likely to help homeowners nearing the end of a fixed-term mortgage, as well as prospective buyers, but lenders usually work to the longer-term interest rate forecast.

Still, it's likely to be "music to mortgage borrowers' ears", said ThisisMoney, especially those on tracker mortgages, who should see an "immediate benefit".

Savers: losers

The cut is "unequivocally bad news" for savers, said Isaac Gross, economics lecturer at Monash University, on The Conversation. With money "growing more slowly", it's harder to build income "over time".

But "don't worry", said Akoni Hub – if you're "proactive", you "don't have to settle for low returns – even with a base rate cut". In fact, it can be the "perfect nudge" to research better deals, often offered by challenger banks keen to "attract new customers".

Small business owners: winners

Smaller businesses "historically" benefit from rate cuts, said Aberdeen Investments They typically deliver "higher returns" after a rate cut when compared to larger companies, as they "tend to have more exposure to the UK domestic economy".

Retired people: losers

Left work? The chances are that you "rely on income from interest-bearing assets" to fund your retirement, including fixed-term or cash savings accounts, said Gross on The Conversation.

Coupled with a cost-of-living crisis, a base rate cut "only makes things worse" as returns for this group "shrink", making it hard to fund a typical lifestyle in retirement.

As retirees have "less time to ride out any market turbulence, as is currently being experienced", said The Telegraph, their cash savings growth will be impacted.

However, with Donald Trump's tariffs to also contend with, and ongoing "market chaos", some pensioners suggest "as much as £120,000" has been lost from the value of their retirement pots.

The Office for National Statistics has had to delay the release of trade data due to errors in its analysis – the latest setback for the beleaguered government agency.

The delay of the trade data, announced with one day’s notice, "will fuel questions over the reliability of figures produced by the ONS", said the Financial Times, after long-running problems with its key Labour Force Survey.

What did the commentators say?

"If statistics enable the state to see, then the British government is increasingly short-sighted," said The Economist's Bagehot column.

The LFS, for example, "once a gold standard of data collection, now struggles to provide basic figures". Whereas 10 years ago response rates to the survey were about 50%, they fell to just 17.3% in 2023 and are expected to be even lower in the past year. This "has left interest rate-setters without reliable employment data for almost 18 months", said the FT. Some economists "think the LFS is now more likely to record people who are at home – thus overestimating the level of economic inactivity overall", said MoneyWeek.

Those working at the ONS blame "funding constraints, a lack of modernisation and staff being afraid to raise problems", said Bloomberg. The issue of plunging response rates to the LFS "was raised internally around a decade ago", but "radical action to address the issue was delayed".

The ONS has been building up a new index, the “Transformed Labour Market Survey”, to replace the LFS. But "repeated twists and tweaks mean it may not be ready to launch until 2027", said The Guardian. Meg Hillier, chair of the Treasury Select Committee, said the delay would rob policymakers of reliable data about the jobs market, making "some of the most consequential decisions taken by the Treasury and Bank of England challenging at best and misinformed at worst".

What's next?

The ONS deserves credit for being a generally trusted source of accurate data, said Andrew Sentance on CapX. But "we need much quicker action from our official statisticians and their regulators to fix problems".

Maybe it's a wider shift in attitudes that is needed, said The Economist's Bagehot. "If the state can compel people to sit in a stale room for hours to decide if someone is a thief, it can force people to fill in a form."

The value of the pound shot up after news that the UK's rate of inflation had eased in May to the Bank of England's target of 2%, for the first time in three years.

The Office for National Statistics (ONS) revealed that Consumer Price Index (CPI) growth fell from 2.3% in April, "delivering a fillip" to Rishi Sunak as he tries to "turn around his struggling election campaign", said the Financial Times. "The figure marks a milestone for the UK economy after the worst inflationary upsurge in a generation."

However, sterling "eased back slightly" after it emerged that, despite easing in CPI, services inflation was "stickier than expected", said Sky News. That fell to just 5.7% in May – higher than forecast, which reduced the chance that the Bank of England (BoE) would cut interest rates in June. The Monetary Policy Committee is now expected to keep interest rates at a 16-year high of 5.25%.  

What did the commentators say?

The figures are a "rare nugget of good news" for the prime minister, who called the general election on the day the April figures were published, said Politico's London Playbook. Inflation is "back to target", said Sunak, "and that means people will start to feel the benefits and ease some of the burdens on the cost of living". 

Taking credit for that was "a piece of chutzpah" from Sunak, said Sky News business presenter Ian King. But unless there is a "major global shock", nothing like the peak inflation of 11.1% in October 2022 is expected again "any time soon", said business reporter Daniel Binns. The housing market is also continuing to "show signs of recovery from the slowdown in late 2022 and 2023". 

But rents – which recently hit a record high – are continuing to increase, according to the ONS. The economy has also not yet dealt with the effects of attacks by Yemen's Houthi rebels on cargo ships in the Red Sea, said assistant economics professor at Durham University, Michael Nower, in The Conversation. Shipping costs are up 150% since December 2023 – which will continue to "feed through into inflation". Domestically, "productivity growth remains persistently low".

In terms of business, "the economic lifeblood of the UK is actually strong", said Michael McLintock, the chairman of city investor group The Investor Forum. The UK has the most unicorns (start-ups with a value of at least $1 billion) in Europe. 

But "three decades of regulatory creep" has "diluted Britain's risk appetite and fuelled a vicious cycle of lower returns and lower growth", said The Telegraph's economics editor Szu Ping Chan. 

The 2008 recession "reinforced a growing culture of risk aversion that leading figures in the City warn will be hard to unpick". A lack of capital and investment has also left the UK "increasingly dependent on immigration to grow the economy".

Britain is actually "starving" for public investment, wrote academic Adrian Pabst in The New Statesman – with some of the "lowest levels" in the West". A new IPPR report this week, titled "Rock Bottom", placed the UK 35th in the 38-country OECD. 

But the fiscal target of limiting the annual budget to 3% of GDP, and reducing it over five years, "acts as a further brake" on investment. But this "stale fiscal orthodoxy" discourages the very thing on which "higher economic growth, higher productivity and higher living standards depend". And judging by both parties' manifestos, it looks set to continue. "At a time when Britain needs to revive an active state, this is a self-imposed straitjacket." 

What next?

The BoE expects inflation to "tick up again later this year", which could contribute to "caution" in cutting interest rates, said Binns. Most predict the BoE may delay cutting interest rates until September.

But at the end of the day, wrote John Stepek in Bloomberg UK's Money Distilled newsletter, "whether there's a rate cut in August, September or even as late as November (gasp!) will make very little difference to the personal finances of anyone who isn't a City trader." The chances of rates returning to levels typical in the 2010s are "extremely low". Neither Starmer nor Sunak will get them down to sub-1% rates – "a good thing, by the way", to avoid another financial crisis.

The longer-term impact of artificial intelligence should not be discounted, said Nower in The Conversation. "The AI revolution, which the UK is embracing" is predicted to have a similar impact to the so-called "ICT revolution", which contributed to a fifth of UK GDP growth from 1989 to 1998.  

But whichever party becomes the next government, it "needs to put forward a credible 10-year plan of public investment to the tune of 5% of GDP a year", said Pabst. "Only then is there hope for a genuine decade of national renewal."

The UK has experienced a surprise rise in inflation, due mainly to higher prices for tobacco and alcohol. 

In the first increase in 10 months, inflation was at 4% in December, a slight rise on the November figure of 3.9% but one that is "complicating the timing of interest rate cuts" by the Bank of England, said The Guardian. Inflation, though, was still "on track to drop below the Bank’s 2% target by the spring".

Meanwhile, Japan, which has long battled chronic deflation, is now also struggling with inflation. "Stagnant" earnings have "started to show signs of movement" and flat inflation in December has eased pressure on the Bank of Japan, but it is still too early to tell if Japan has "turned the corner toward self-sustaining wage-price increases" or if it will slip back into deflation, said William Sposato on Foreign Policy.

But what are the pros and cons of inflation, and how exactly does it affect economic decisions and the day-to-day lives of citizens?

Pro: economic growth

Moderate inflation can be a "sign of a healthy economy", said Hunter Ray Barker on Forbes, as it "typically occurs when there is strong demand for goods and services".

The demand "theoretically helps increase production", wrote Sean Ross on Investopedia. More money in the economy "translates to more spending" and greater demand for goods and services. The demand "triggers more production" to meet it, resulting in economic growth when there are unused resources and labour capacity.

Con: possible recession

If there is, however, too much spending compared to the capacity to supply goods and services, then an economy can eventually about-turn into a recession. With high demand and low capacity, prices then surge and consumers begin to stop spending.

When businesses do not have "enough customers and workers can't find enough jobs", it results in a slow down of "buying and spending across the board", said Yahoo Finance.

Inflation does not always "trigger a recession" but it is a factor governments try to "tame" by slowing down spending by using tactics such as interest rate hikes. And though that slowing does not automatically mean a recession, it can create a "self-sustaining cycle" that "very easily" can slip into a recession.

Pro: better wages

Moderate inflation and a productive economy make it easier for workers to receive pay rises and maintain a higher standard of living. With low inflation "relative wages can easily adjust", said the Brookings Institution, and businesses can tailor what they offer employees to "accommodate" their respective "differences in economic fortunes".

If there was zero inflation, it could mean more real wage unemployment (an excess of labour), while too high inflation will result in a real-terms pay cut if wages do not match prices.

Con: fall in value of savings

Inflation that is too high can have an impact on how much savings are worth. Money held in an account with a "lower interest rate than inflation" will mean it is being "eroded" by the cost of living, said The Times Money Mentor.

However, inflation can be good for savers as with "high inflation comes high interest rates", said the personal finance site. When the Bank of England raises the interest base rate to discourage spending, the interest rates on savings accounts should in turn go up.

Most savings accounts, however, "usually don't offer enough interest to beat inflation", and the value of savings steadily decreases, said Business Insider.

Pro: stimulates investment

Moderate levels of inflation can stimulate investment, said Barker at Forbes. Investors are "more likely to invest in assets, research and development, or infrastructure" in a moderate inflation environment if they can expect a return that may "outpace inflation". That, in turn, boosts the economy by creating jobs, higher income and great consumption.

Con: squeeze on public services

Excessively high inflation also causes problems for public spending. When money is worth less, it poses an immediate problem for public services, whose budgets are "set in cash terms" and will not "automatically increase in the face of higher-than-expected inflation", said the Institute for Fiscal Studies. 

It means services, including hospitals and schools, can "purchase fewer goods and services" and face a budget that is "smaller in real terms", causing an "unintended dose of austerity".

Fears the UK is heading for a recession are growing as the economy unexpectedly shrank slightly in the third quarter, with gross domestic product falling by 0.1%.

The "tepid numbers" from the Office for National Statistics (ONS) for the three months to September represent a "downward revision" from the earlier estimate of a 0.2% increase, and highlight the economy's struggle to "shake off low-growth performance", said the Financial Times.

The figures mean the UK is "at risk of recession", said the BBC. So how might the nation's economy perform in 2024?

What did the papers say?

The UK's economy is "stuck in a lacklustre state" as it wrestles with "high borrowing costs and the legacy of the worst inflationary upsurge for a generation", said the FT.

Projections released by the Bank of England in November suggested there is "little immediate prospect of a bounceback", as the central bank forecasts "near-zero growth through next year, even as the worst of the inflation subsides".

But speaking to the paper, Chancellor Jeremy Hunt insisted that 2024 was "when we need to throw off our pessimism and declinism about the UK economy".

Hunt has "sought to give Tory MPs an early Christmas present" with "another hint he could cut taxes ahead of a general election next year", said The Independent. The chancellor said the government would "cut the tax burden if we are able to".

He also raised the prospect of the Bank of England reducing interest rates in 2024, which is "when people will begin to have more confidence about their own personal prospects and the prospects of their family".

However, the FT said that his talk of rate cuts will "jar" with the Bank of England, which "jealously guards its independence and has been insisting it is too soon to discuss easing policy".

If employment "stays solid" then the economy "should do OK", John Stepek wrote for Bloomberg, but if unemployment "really surges (as opposed to rising a bit), then all bets are off".

Stepek also forecast that 2024 would be "sluggish for the housing market". Although Hunt "probably doesn't have much room for fireworks at his next budget", he added, it's "hard to see him resisting some sort of freebie" in the form of a tax cut.

But there could be big problems from further afield. Philip Pilkington warns in The Telegraph that the West is "sleepwalking into an economic catastrophe in the Red Sea". The Houthi rebels "could well manage to enact a de facto blockade of the Suez Canal by preventing commercial maritime vessels entry to the Red Sea", he wrote, and "the economic effects of this could be nothing short of profound".

If the Red Sea "remains a no-go zone for some time", it "looks like the Western world is going to have to brace for another wave of inflation", and "frankly, it is not clear that our economies, beaten and bruised from the last wave, can take it".

What next?

The latest ONS figures "show how close the UK could have come to a formal recession, which is marked by two consecutive quarters of negative growth", said The Times, but it will "not be clear until February" whether the UK has entered or avoided recession when figures are released for the October to December quarter.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, told The Times he expected growth to hold steady in the final three months of the year, "before then rising at an average quarter-on-quarter rate of 0.3% during 2024".

However, one of the world's biggest active bond fund managers has "dampened the festive mood" by warning of a serious economic downturn next year, said The Guardian.

Daniel Ivascyn, chief investment officer at Pimco, compared the UK economy with the US, and said that "in the case of the UK – a smaller, open economy, with a consumer that's feeling the brunt of central bank policy far more than their US counterparts – you just have a higher probability of more significant economic deterioration".

He added that "there's potentially more hard landing risks", a term that refers to a marked economic slowdown or downturn following a period of rapid growth.

The Bank of England raised interest rates for the 14th time in a row today, by 0.25%. The Bank’s Monetary Policy Committee voted by a 6-3 majority in favour of the rate rise.

At 5.25%, interest rates are at a “fresh 15-year high”, said The Times Money Mentor. Monthly repayments will increase for “around 1.4 million mortgage holders on tracker deals” as a result, which may have a knock-on impact for some tenants in privately rented accommodation.

But the rise does “mark a smaller increase than July’s dramatic rise” from 4.5% to 5%, suggesting “price rises have begun to ease”, said the BBC. And “banks may offer greater returns on savings accounts”.

The consumer prices index (CPI) dropped to 7.9% in the year to June, a fall that was “larger than expected”, said The Times Money Mentor. The Bank of England (BoE) hopes that raising rates will help to further ease inflation, but the CPI remains “well above most industrial nations”, said The Guardian, and is “almost four times the Bank’s 2% target”.

Rishi Sunak told LBC yesterday that there is “light at the end of the tunnel” for many people in the UK, but admitted that progress on his promise to halve inflation by the end of the year was not moving as quickly as he would like. He said he was making “difficult but responsible decisions” in order to “bring down inflation for everyone”.

In the US and the eurozone, “hopes are rising that interest rates are close to a peak”, said the Financial Times, while in the UK, financial markets are expecting further 0.25% increases before the end of the year.

Announcing the increase, the BoE said it expects inflation to drop “markedly” this year, and that its target of 2% could be met by early 2025.

Bank of England (BoE) governor Andrew Bailey has said inflation will fall “markedly” this year, as he signalled that the central bank is likely to raise interest rates once again in an attempt to reach its 2% inflation target.

Bailey made the comments at the annual Mansion House bankers’ dinner, attended by Chancellor Jeremy Hunt and Rishi Sunak, insisting that falling energy and food prices would drive down inflation over the rest of the year.

“It is crucial that we see the job through, meet our mandate to return inflation to its 2% target, and provide the environment of price stability in which the UK economy can thrive,” said Bailey in his speech, admitting that inflation was “unacceptably high”.

So far, the government has relied on the central bank to return inflation to the mandated target. The main tool in the BoE’s arsenal is raising interest rates – which it has done 13 times since December 2021 – increasing the cost of borrowing from 0.1% to its current level of 5%.

But with inflation remaining at a stubborn 8.7% in May, the wisdom of the BoE’s strategy has been questioned by some economists.

The Week takes a look at five options available to the UK.

Raise rates again and risk recession

In May, Chancellor Jeremy Hunt said he was comfortable with the central bank doing whatever was needed to bring down inflation, even if that could cause a recession, telling Sky News: “Yes, because in the end, inflation is a source of instability”.

The power to raise interest rates lies with the Bank of England. But the markets are predicting that interest rates could climb to a high of 5.5% by the end of the year, despite rates already being at their “highest level since the middle of the global financial crisis in 2008”, said Politico.

Make changes to tax and spending

One “very unpalatable” option for the government is to raise taxes or to raise taxes and make cuts to public spending – essentially a second round of austerity.

Laura Suter, head of personal finance at AJ Bell, told The Mirror the government could “opt to raise taxes, cut Government spending or cut back on the cost-of-living payments” to “reduce household spending further”. But with households already at “breaking point” this would be a “politically unpleasant” move ahead of a general election.

A policy paper presented to HM Treasury last autumn made the argument for the UK to address inflation through fiscal policy rather than relying solely on interest rate adjustments. The paper, by Cambridge economics and history fellow Charles Read, highlighted the potential risks of rapidly raising interest rates, including the possibility of a financial crisis in the shadow banking sector.

Instead, fiscal policy changes such as reducing value-added tax (VAT) could directly impact prices without destabilising the banking sector, he suggested. Funding these measures could involve eliminating tax benefits primarily benefiting the wealthy, such as the capital gains tax discount.

Quantitative Tightening

Another tool the BoE could consider is increasing its quantitative tightening (QT) programme as a means to reduce demand and control inflation.

During the pandemic, the central bank employed quantitative easing (QE) by purchasing bonds and injecting money into the economy, leading to lower interest rates and increased inflation.

Alice Haine, a personal finance analyst at Bestinvest, suggested to The Mirror that if QE was “so effective at stimulating the economy” then QT could “have the reverse effect”. The central bank could accelerate the pace of reducing its government bond holdings through QT, she suggested.

Price controls

This has been a “more successful tack” taken by France, after President Emmanuel Macron capped how much state energy companies could charge their customers last January, with the government subsidising the financial gap, said The Guardian.

The controls were subsequently lifted when gas and electricity prices began to fall, leaving inflation in France at “almost half the rate” seen in the UK in 2022.

Lower energy prices in Europe have eased overall price pressures, but the cost of food has continued to “soar”, said the Financial Times (FT). Countries such as Croatia and Hungary have introduced food price caps, while France has negotiated a “looser agreement” with food retailers to offer essential items at the lowest price possible.

The UK could consider targeting producers and retailers with price controls to tackle the food inflation rate – a major driver of overall inflation – suggested The Guardian, but it would be “difficult to monitor prices and impose caps in the internet age”.

Give up on the 2% target

It would be a “radical idea” but central banks like the BoE and the Federal Reserve could give up on their 2% inflation targets, said Investors’ Chronicle. Although the BoE makes its case for “low and stable inflation” a 2% target is “relatively arbitrary”.

Economist Olivier Blanchard argued in a 2010 International Monetary Fund paper that policymakers should consider a higher target of 4%, which would give central banks more room to react to economic shocks.

However, the FT’s chief economics commentator Martin Wolf argued that the UK shouldn’t give up on the 2% target, saying “if a country abandons its solemn promise to stabilise the value of the currency as soon as it becomes hard to deliver, other commitments must also be devalued”. Doing so may lead many, both at home and abroad, to conclude that the UK “is unable to keep its promises when things get tough”.

Rishi Sunak has blamed the high number of fixed-rate mortgages for his government’s failure to bring down inflation.

Speaking to the Commons liaison committee yesterday, the prime minister claimed that the preponderance of homeowners on multi-year deals was the reason why inflation has been “proving more persistent” than anticipated.

But experts don’t all agree with the PM. Many argue that the UK’s stubborn inflation is due to a combination of factors, many global rather than national, which have been exacerbated by the fact that many economists and central bankers “were late to spot just how big a problem this wave of inflation would prove,” the Financial Times (FT) said.

Critics immediately responded that the prime minister’s comments were not only false, but “tin-eared” in their lack of sympathy for struggling mortgage holders.

Sarah Olney, the Liberal Democrats’ Treasury spokesperson, said: “Homeowners on the brink are facing yet more mortgage misery, while Rishi Sunak’s comments get more tin-eared by the day.

“It shows this Conservative government is just totally out of touch. Conservative ministers sent mortgages spiralling through all their chaos and incompetence. Now they are refusing to lift a finger to help”, Olney said.

What did the papers say?

The reason for inflation’s persistence in the face of aggressive rate rises is down to a “tight labour market, shifting housing market trends and the fragility of the global economy”, said the FT, but it is important to remember that monetary policy “always comes with a lag”, taking around a year and a half for the impact of a single rate increase to “fully seep through into spending patterns and prices”.

Monetary policymakers only began raising rates under a year and a half ago in the US and UK, and under a year ago in the eurozone, the paper said, so it is not surprising that we have yet to see much impact.

Regardless, the UK remains an outlier, said City AM. Britain is now the only rich country where inflation is rising, signalling that the Bank of England’s series of interest rate rises “have been less effective than its peers”, the paper said, citing new data out yesterday.

According to the Organisation for Economic Co-operation and Development (OECD), inflation across G7 nations fell to 4.6% in May, down from 5.4% in April. In the UK, meanwhile, inflation rose to 7.9% in May from 7.8%.

While it is true that most of the world experienced economic fallout from Covid-19 and the war in Ukraine, in the UK “this has been exacerbated by Brexit and 13 years of government austerity measures”, said Open Access Government.

As a result, the scale of the crisis here in Britain is “far worse when compared to most of the OECD countries”, the site said, “and certainly among those in the group of G-7”.

Additionally, there is the prospect of greedflation as “banks, oil companies and many companies in food supply chains are very clearly increasing their absolute levels of profit, and their profit rates,” as interest rates increase, tweeted political economist Richard Murphy.

Murphy’s assessment is that increasing interest rates is in fact an inflationary act with the Bank of England’s assessment appearing to be “based on what economics textbooks say, and the relationship between economics textbooks and reality ceased a long time ago”. Murphy added that a recession now seems to be inevitable as the Bank “has always wanted a recession to control inflation”.

What next?

Numerous economists agree with the prime minister’s suggestion that the effects of the Bank of England’s rate increases are taking longer to feed through to the economy due to the prevalence of homeowners on fixed mortgages rather than floating contracts.

Those who do say we may see inflation turn a corner soon, City AM said, because at the start of 2024 millions of mortgage owners are set to roll on to new deals with much higher rates, which could help bring down inflation by “eroding their spending power”.

There is a further risk that the longer lags from the rate rises,the more the Bank of England is at risk of being “egged on by the markets into raising rates in response to figures that are disappointing”, which could result in “overkill and further damaging the economy, perhaps very seriously”, said David Smith, the economics editor of The Sunday Times.

But the broader problem, not just in Britain but around the world, may simply be that central bankers raised rates too late, said the FT. Their initial insistence that inflation would prove short-lived led to delays which “may have made inflation all the more difficult to vanquish”.

The risk now is that high inflation becomes the norm, according to the Bank for International Settlements (BIS). Claudio Borio, the head of BIS’s monetary and economics unit, warned last year that he was concerned that “inflationary psychology” was setting in.

With inflation remaining stubborn, the future looks bleak, said Jennifer McKeown, chief global economist at Capital Economics. And the ultimate effect will be that higher rates “push most advanced economies into recession in the months ahead”.

Tory ministers have a long record of making rather callous statements about the economy, said Paul Waugh in The i Paper.

Norman Lamont famously claimed that unemployment was “a price well worth paying” to beat inflation. On the same theme, John Major declared that “if it isn’t hurting, it isn’t working”.

In the wake of the Bank of England’s decision to hike interest rates by half a point to 5% last week – heaping financial pain on mortgage holders – Rishi Sunak reached instead for an “earnest and soothing” tone. “It is going to be OK and we are going to get through this,” he told workers at an Ikea warehouse.

The PM, who has made halving inflation by the end of the year one of his “key pledges”, reassured his audience that he was “totally, 100% on it”. But with inflation still stubbornly running at 8.7% in the UK, is there anything Sunak can do about it? And are we, in fact, going to be OK?

‘Power lies with the Bank of England’

Inflation is “largely outside ministerial control”, said The Times. There is little that can be done in Whitehall to tamp it down, “aside from arresting rises in public sector pay”. This hasn’t stopped the Government from “attempting to look busy”. Chancellor Jeremy Hunt has called in bank bosses, food producers and industry watchdogs to urge them to keep down prices and to agree steps to ease the pain for consumers. This may help “concentrate minds”. But the truth is that real power “lies two miles to the east”, in the Bank of England. Inflation “will come down as higher interest rates take hold, but not quickly”. That will require “painful interest rates for months to come”.

For Sunak, all this could hardly be “a worse launchpad for a period of important electioneering”, said Toby Helm in The Observer. More than 1.4 million fixed-rate mortgage customers will come off their deals this year, and will face significant hikes; the average increase will be £2,700 per year. In seats such as Selby in North Yorkshire, where one of three upcoming by-elections will take place, many took out large mortgages during the low-interest years.

‘Sharp slowdown and higher unemployment’

There is “a lot of anger” now. It’s not even clear that the medicine will work, said Sean O’Grady in The Independent. The usual solution to inflation is to take money out of the economy by making borrowing more expensive. But the main problems faced by Britain are not caused by “cheap money”. They’re caused by a shortage of goods and labour, thanks to Brexit, Covid, early retirement and the war in Ukraine. The Bank can’t do anything about those: all it can do is wallop a relatively small number of mortgage holders.

Even so, it must press ahead, said Martin Wolf in the FT. Wage-price spirals are already taking hold. We won’t get back to 2% inflation without “a sharp slowdown and higher unemployment” – in short, without a recession. The only alternative would be for the UK to abandon its commitment to a stable currency, as in the 1970s. That would be “an unpardonable – possibly even incurable – folly”.

The UK’s economy shrank by 0.3% in March, with the first quarter of 2023 seeing “sluggish growth” of 0.1%, placing the UK once again towards the bottom of the league table of developed economies.

The figures come less than 24 hours after an admission by the Bank of England that it does not expect inflation to fall to its 2% target until 2025.

The UK’s 10.1% inflation rate is the worst in the G7 club of rich economies, said The Times, leaving many wondering what is making the UK economy so uniquely poor.

What did the papers say?

Car sales and the retail sector had a “bad” March, said the BBC, with poor weather and industrial action also pointed to by some as being behind the month’s poor figure.

“Strikes and the weather are factors here,” said the BBC’s economics editor, Faisal Islam, “but there is no denying the sluggish pattern that has persisted for a year now, as energy prices have risen.”

He pointed out that, on a quarterly basis, the UK economy has “still not regained all the ground lost since the pandemic and Brexit”.

Inflation is being kept so high by the “rising cost of services since the pandemic, increasing energy costs caused by the war in Ukraine, and record food and clothing prices”, said The Times.

Overall inflation remains stubbornly high “largely because food inflation, running at almost 20%, is coming down more slowly than predicted”, wrote Larry Elliott, economics editor of The Guardian.

But why are food costs so high? Supermarket bosses blame “meddling ministers” after they imposed “eye-watering” costs on the industry, said The Telegraph.

The bosses of Britain’s biggest grocers told John Glen, chief secretary to the Treasury, that “onerous regulation covering everything from recycling to border checks was making the weekly shop more expensive”.

Some are blaming Brexit, wrote Richard Partington, The Guardian’s economics correspondent, as it has “added to delivery times and costs for UK imports, a factor likely to be passed on to consumers in the shops”. In addition, a “lack of available staff in many sectors of the economy is forcing companies to offer higher wages to recruit or retain employees”.

Meanwhile, Duncan Simpson, executive director at the Adam Smith Institute, a think tank, told The Telegraph that the “failing Bank of England” was to blame. “Years of low rates and printing money has led to sky-high inflation,” he said. “Britons are now reaping what the Bank has sown.”

However, said the Financial Times, the Bank’s governor, Andrew Bailey, has criticised “the language of blame”, saying the Covid pandemic and the war in Ukraine were events that had pushed up inflation and which the Bank “could not have anticipated”.

What next?

Those looking for good news on the horizon will have their eyes fixed on two forthcoming announcements. The current second quarter could “see a fall” in GDP, warned Islam, due to the extra bank holiday for the coronation. This would leave people hoping for better news later in the year.

Meanwhile, the next consumer price inflation (CPI) figures are due to be reported on 24 May, and analysts will be hoping for better news there. “It will be significantly lower – probably in the region of 7% to 8% – purely because of base effects,” wrote John Stepek for Bloomberg.

Were inflation to remain stubborn, it could have political ramifications for the prime minister, who promised to halve it by the end of the year. “If I were Rishi Sunak,” wrote columnist Jack Kessler in the Evening Standard, “I would be concerned… most of all about inflation, which is looking awfully sticky.”

Although the Bank of England expects inflation to fall to 5.1% by the end of the year, that is significantly higher than the 3.9% in its February forecast, “placing the prime minister’s pledge to halve inflation at risk”, he added.

Meanwhile, there is a danger that further interest rate rises could write a plot twist into the story, said Elliott. The “higher rates go the bigger the risk that the economy will at some point crack under the strain”, he wrote, warning that “having been relentlessly too pessimistic in the past”, the Bank of England “could now be overly optimistic about the economy’s resilience”.

The Bank of England’s chief economist has come under fire for urging British people to accept they are poorer.

Warning that inflation risks remaining doggedly high, Huw Pill told a Columbia Law School podcast that “somehow in the UK, someone needs to accept that they’re worse off” and “stop trying to maintain their real spending power by bidding up prices whether through higher wages or passing energy costs on to customers”.

He added: “What we’re facing now is that reluctance to accept that, yes, we’re all worse off and we all have to take our share.”

His remarks have been condemned as a “red rag to the bull” and “absolutely outrageous”, said the BBC. But was he right?

What did the papers say?

The interview will “surely go down as one of the most tin-eared”, wrote Ben Marlow, chief city commentator for The Telegraph, and has “rightly” provoked a “backlash from across the political divide”.

“Almost everyone in some form, and through no fault of their own, is markedly worse off than they were 18 months ago,” said Marlow, so “why shouldn’t people demand more pay if their cost of living has gone through the roof?” To ask for a pay rise is “an entirely normal reaction to seeing everyday life become so eye-wateringly expensive”, he said.

Writing for The Independent, Ryan Coogan, who was brought up by a single mother in “one of the most deprived areas of the UK”, said that “for me, for my family, and for the people I grew up around, ‘accepting’ that we’re poor has never been an option”.

“Throwing our hands up and saying ‘you got me, Huw, I guess this is just my life now’ is unacceptable,” he said. “Even if you can’t improve your lot in any meaningful way, you have to fight like hell to. Because if you don’t, what’s the alternative?”

Reporting from a community centre in Wolverhampton, the local authority with the highest fuel poverty rate in England, Jessica Murray of The Guardian said the economist’s “choice of language has riled those who come face to face with the reality of the cost-of-living crisis on a daily basis”.

Pill “isn’t going to win a popularity contest”, but he is right, said Ross Clark for The Spectator. “In an economy which is stagnant, where productivity is flat”, it “ought to be obvious that we can’t all have a real-terms pay rise”, he argued.

Clark added that “certain groups of workers” can have a pay rise “at the expense of others”, or “we can all have a nominal pay rise”, but inflation “ensures we cannot have the economic equivalent of a perpetual motion machine” because “if wages go up in a stagnant economy, prices will rise to match”.

What next?

Behind Pill’s remarks is a fear that inflation, rather than falling this year as previously predicted, might remain at its current level. Economists at the Bank of England are “worried” that “as workers try to bid up their wages to protect their finances from inflation and businesses raise prices to shield profit margins”, high inflation will “become a permanent fixture of the UK economy”, explained City A.M..

In March, inflation in the UK dropped by less than expected, to 10.1%. In contrast, annual price growth in the eurozone is 6.9%, and 5% in the US. This “extra stickiness” in the UK’s inflation is “linked to a few factors”, said the Financial Times. Energy prices have been “the driving force behind European inflation” and “the plunge in wholesale natural gas prices, and thus the decline in inflation, is filtering through faster in some EU countries compared with the UK” partly due to differences in how consumer energy prices are set.

Britain’s underlying inflation is higher than in many advanced economies, it added, “in part down to a unique set of factors causing labour shortages, including early retirement, sickness and a change in immigration rules post-Brexit”. Nevertheless, predicted the paper in a leader comment, “prior interest rate increases will increasingly filter through, weigh down demand, raise unemployment, and ease price pressures”.

“Barring another big energy price shock”, the UK’s cost-of-living pressures “should be easing over the coming year,” agreed Mehreen Khan, economics editor, and Oliver Wright, policy editor, in The Times. Inflation will “automatically drop from March” as “the rate of annual price increases will no longer include the sharp spikes in gas and oil prices recorded last year”.

However, they added, “even on current trends”, the Office for Budget Responsibility does not expect incomes to have recovered to 2019 levels until 2028 at the earliest.

“Pill’s comments about the UK being poorer are indisputably true,” they said, but the idea of accepting this is “out of step” with the Bank’s own analysis that “wage pressures will subside from the second half of the year”.

The chancellor has warned that “we are not out of the woods” despite new figures showing that the UK narrowly avoided falling into recession in 2022.

The economy flatlined in the final three months of last year, following a drop of 0.3% between July and September, meaning the UK is not technically in recession – which is defined as two consecutive quarters of economic decline.

“The fact the UK was the fastest growing economy in the G7 last year, as well as avoiding a recession, shows our economy is more resilient than many feared,” said Jeremy Hunt.

However, economists and commentators warned that the outlook remains bleak and that even if the UK has not entered a recession yet, for many it will still feel as if it has.

What did the papers say?

Britain has avoided a recession “in the least glamorous way possible”, wrote Kate Andrews for The Spectator, because “it is not a story of growth, but a story of stagnation, that has kept the dreaded label of ‘recession’ at bay”.

There is “no guarantee that people feel better off”, she added, because “with real wages taking such a hit, many will feel as though we’re in recession anyway”.

“Whether we’re ‘technically’ in a recession isn’t actually so important,” said Politico’s London Playbook, because “when such small changes are involved, a plus sign is not a conveyor belt of milk and honey, any more than a minus sign is Armageddon”.

The National Institute of Economic and Social Research told the newsletter that “this year will feel like a recession for many, regardless of the data”. It added that “a focus on the economic crisis faced by most of the British population, rather than technicalities, offers a more insightful perspective”.

Political economist Richard Murphy agreed. “Who cares if we are not in a technical recession if millions of people cannot make ends meet, heat their homes, pay the rent or mortgage and feed their children?” he asked on Twitter.

Reuters put the data in a global context, noting that the UK’s output in the fourth quarter was still 0.8% below its pre-pandemic level, “in sharp contrast to other major advanced economies which are now above their pre-pandemic size”.

Despite the good news of a recession averted, City AM noted that the markets were un-buoyed: the FTSE100 index was trading slightly lower, down 0.24% this morning.

What next?

The Bank of England is still expecting a recession to occur sometime in 2023 but believes that the period of negative economic growth will be shallow and shorter than previously predicted.

Most analysts agree. Paul Dales, chief UK economist at Capital Economics, told the Evening Standard: “Given that the drags from high inflation and high interest rates are very large, we still think the economy will enter a recession this year.”

And Jeremy Batstone-Carr, from Raymond James Investment Services, told the Daily Express that “we are still in for the downturn which so far has been barely kept at bay”.

Although “there is greater hope that a downturn may never materialise at all or could be shallower or much more short-lived than initially feared”, Alice Haine, personal finance analyst at Bestinvest, told The Sun, the economy is “not out of the woods yet”.

A “milder recession” would mean that “unemployment rises more slowly, wage growth stays strong and domestically generated inflation falls at a slower pace than expected”, Thomas Pugh, an economist at RSM UK, told This Is Money.

However, he added, this could in turn be bad news for homeowners as it “could result in the Bank of England raising rates by more than expected”.

Rather than the economy going into recession, it may just remain flat, argued one pundit. Instead of “doing the timewarp and bracing for a recessionary return to the seventies, sparked by energy shocks, soaring inflation and industrial strife”, Susannah Streeter, head of money and markets at Hargreaves Lansdown, told the Daily Mail, “we could be heading for an early noughties-style period of stagnation”.

Mortgage rates had started 2026 on a downward trend but borrowers are being urged to act fast as the Iran conflict threatens to send pricing upwards.

Customers had been benefiting from a mortgage price war towards the end of last year after December’s interest rate cut helped pricing drop below 4% in some cases, “prompting a drop in rates in the build up to the new year”, said MoneyWeek.

Sticky inflation was already putting pressure on pricing but tensions in the Middle East and Iran are providing a “new threat” to mortgages. Last Thursday, the Bank of England once more held interest rates at 3.75%.

There has been a “vanishing act” in sub-4% mortgages in recent weeks, said Moneyfacts, while average rates have climbed back above 5%.

What determines mortgage rates?

Lenders consider a range of factors when setting their mortgage rates. A big factor is interest rates, set by the Bank of England.

Borrowing “gets cheaper” when interest rates drop, said MoneyHelper, which can “make it easier to find good deals”, but the cost will also rise if interest rates go up.

Another consideration is the cost the banks face for obtaining funds to lend on the financial markets, which is based on swap rates. These are “a contractual arrangement between two parties” involving swapping a set of interest payments for another, said Private Finance, something that happens “over a specific duration”.

Lenders “often see swaps as their cost of funding”, and consequently “they need to make a margin on top of these”. They only impact fixed-rate mortgages, but “the higher the swap rate, the higher the mortgage rate” as a general rule of thumb.

This is where the Iran conflict is having an impact, as there are fears that the closure of the Strait of Hormuz will cause higher oil and gas prices that can “stoke inflation”, said The Guardian. That makes imminent interest rate cuts unlikely, plus the “uncertainty” has already pushed up the money market swap rates.

This will be of “particular concern”, said This Is Money, to the one million households coming to the end of a fixed-rate deal this year as pricing could be more expensive than they are used to.

 When will mortgage rates come down again? 

Unfortunately, mortgage rates are “more likely” to be going up than down at the moment, said MoneyWeek. Some lenders have even cancelled planned rate cuts or pulled deals from the market entirely.

The good news for current borrowers is that higher pricing won’t affect you “in the short term” until you need to remortgage, said UK Finance. Currently, three-quarters of homeowner mortgages are on a fixed rate.

For those looking for a home loan, said This Is Money, brokers are advising they “lock in a deal as soon as possible to swerve further hikes”.

But the current situation is “unpredictable”, said the HomeOwners Alliance, and “no one knows for sure” what direction mortgage rates will go.

Which mortgage should you choose?

There are two main mortgage products: fixed rates and trackers.

Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, said Money.co.uk. This may sound attractive when rates are low, but “think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge”. Plus, if interest rates go down during the fixed-rate period, your payments won’t.

A tracker mortgage usually follows the BoE’s base rate, and “huge numbers” of people have been on these mortgages “hoping for fixed deals to come down” before they secure their loans, said The Telegraph. 

However, there is always the risk that rates will rise even higher, “leaving you gambling if you don’t fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments”, warned Online Mortgage Advisor.

How to boost your chances of getting a mortgage

Lenders will typically use an income multiple of 4 to 4.5 times the salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, said The Times Money Mentor, but you will need to pass tough affordability tests.

This involves examining your income and outgoings. So “the more money you spend each month, the less you might be able to borrow”, the website said.

You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.

These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.

The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. “Usually, a higher score means you’re seen as lower risk,” said Experian.

You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax. Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, “it might be helpful to be selective about what other loan applications you make”.

How to find support if you are struggling

Being in arrears on your mortgage “might sound like a scary term you’d rather not think about”, but it is important to tackle the problem head-on as it “won’t just magic itself away”, added MoneySavingExpert.

The first best step is to contact your mortgage lender as an “urgent priority”, as missing a mortgage payment without notifying a lender risks “starting the clock towards repossession”, the financial website added.

Support available may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments.

You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.

Benefit claimants, such as those on universal credit, may be able to get help with some of their monthly repayments through the government’s Support for Mortgage Interest (SMI) scheme.

However, it may also be useful to reassess finances, for example, by undertaking a budget or checking if you are entitled to any benefits. These are "other ways to ease the financial pressure", said MoneySavingExpert, and worth exploring even if lender help is sufficient.

What’s the best way to save some money for a rainy day, or to put towards a financial goal? You could put your stash in your current account, but a savings account can help you earn better returns.

And now might be a good time to open one, as recent interest rate rises by the Bank of England have nudged banks to improve the returns offered on their savings accounts.

Savings rates are starting to “hot up after years of low returns”, said personal finance correspondent Kevin Peachey at BBC News.

Types of savings accounts range, and there are a few factors to consider when choosing one, explained MoneySuperMarket, “such as how much return you’ll get and how long it will take to access your cash”. Much of this will depend on your savings goal, the comparison website added. Here is a comprehensive rundown of the types of savings accounts on offer.

Easy access accounts

Easy access accounts give savers the flexibility to withdraw cash whenever they want without losing any interest. The downside with this option is you won’t see the biggest returns.

It’s best to use an easy access savings account as an emergency fund, said financial advice website Unbiased.co.uk, “where you’re more concerned about accessibility than interest rates”.

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• Brown Shipley, 2.82% AER on £1,000 to £85,000, easy access. Withdrawals and deposits allowed (minimum transaction £500 and balance must remain between £1,000 to £85,000)
• Ahli United Bank, 4.2% AER on £1,000 to £85,000, fixed for one year. No withdrawals allowed during fixed term. Interest paid after 12 months
• Starling Bank, 3.25% AER on £2,000 to £1m, fixed for one year. No withdrawals allowed during fixed term. Interest paid after 12 months
• First Direct, 7% on up to £300 per month, fixed for one year, paid after one year. Making a withdrawal will result in less interest being paid. Must also open a First Direct current account (new customers qualify for £175 switching bonus).

Rates retrieved on 16 February 2023. When you apply via links on our site, we may earn an affiliate commission. Rates retrieved on 16 February 2023

Notice accounts

A notice account is similar to an easy access account, but rather than having instant access to your money, you will have to wait a set period – usually between 30 and 180 days – before your withdrawal goes through. There may also be a limited number of times you can withdraw during the year.

This is a good option “if you don’t anticipate you’ll need the amount you’re saving urgently and want higher interest rates but don’t want to pay a penalty for choosing to withdraw”, explained Unbiased.co.uk.

Fixed rate accounts

A fixed rate account may be worth considering if you are happy to lock up a chunk of your savings for a longer stretch of time.

Interest rates are typically higher with these accounts than with easy access accounts, but there is no “easy escape” from a fixed rate savings deal, said Ed Magnus at ThisIsMoney.co.uk, “as typically no withdrawals are permitted before the end date”. Some providers make it clear that access will only be granted in exceptional circumstances, the website added. You may lose earned interest if you want your funds before the product matures.

It can be hard to find a fixed rate savings account that beats or even matches inflation, especially with the rising cost of living. This means the “buying power of your money is reduced”, said MoneyHelper. Alternatively, investing in funds or through shares on the stock market tends to “do better than cash over the long-term, providing an opportunity for greater returns on any money invested over time”, said the site. But it warned that “there’s always the risk that your investments can go down as well as up”.

Regular savings accounts

A regular savings account lets savers earn interest by making regular monthly contributions. These types of accounts tend to pay the highest rates of interest compared to other cash savings accounts, but there are “certain restrictions involved”, said Moneyfacts.

There may be a minimum amount you have to contribute each month, as well as a cap. “Some will penalise you for missing a monthly payment and may not let you access your money until the end of the term,” the financial website added.

Individual savings accounts (Isas)

Individual savings accounts, or Isas, “can bring large tax benefits, especially for higher earners”, said MoneyWeek. But their rules can be somewhat complicated. Savers are allowed to put up to £20,000 into an Isa per year without paying income tax on any returns. You can withdraw money at any time without paying tax. While Isas aren’t an investment, per se, they are the “‘wrapper’ that goes around your savings and investments to protect them from the taxman”, MoneyWeek explained.

A savings account may be beneficial for short-term goals, said NerdWallet, as you are unlikely to exceed the personal savings allowance. But an Isa could be better for larger amounts as “you never have to worry about your interest exceeding the personal savings allowance”, it added. “It will always be tax-free.”

Whichever savings account you go for, generally, “the longer you lock your money away, the higher the rate you can get”, said Shares Magazine.

This article is based on information first published on The Week's sister site, MoneyWeek.com

Business leaders and financial markets have reacted positively to Rishi Sunak’s first few days as prime minister, with commentators noting he has benefited from a “dullness dividend”.

Coined by City economist Simon French, the dullness dividend “is the value that investors would place on a vaguely competent, boring even, Prime Minister leading a stable Government with economic policies that add up”, said the Evening Standard’s business editor Jonathan Prynn.

It follows former PM Liz Truss and chancellor Kwasi Kwarteng’s disastrous mini-budget, which has resulted in the UK’s sovereign bonds, or “gilts”, still trading “at much higher yields than they did before the self-inflicted blow”, said The Economist. Dario Perkins of TS Lombard, an investment research firm, has dubbed this a “moron risk premium”.

The government’s decision to delay the fiscal statement from 31 October until 17 November shows that “Sunak has the good will of the markets” in that “there is less immediate demand for the UK’s update on fiscal strategy”, said The Spectator’s Kate Andrews.

But it remains to be seen how much of an effect the transition in market psychology from “moron premium” to “dullness dividend” will have on government policy.

What did the papers say?

There is a tangible real-world effect to this “dullness dividend”, according to The Spectator’s Andrews. “The irony of Rishi Sunak is this: the most fiscally hawkish of all the leadership candidates (in both races this year) may need to implement the least amount of spending cuts and tax rises,” she wrote. This is because “the state of the public finances is largely improving, thanks to the cost of government borrowing falling fairly rapidly since it became obvious Sunak was going to enter No. 10”.

But despite a forecast of a positive economic tailwind, Sunak held a meeting with Jeremy Hunt, the chancellor, at which they agreed there was still a “massive fiscal black hole to fill and billions in headroom was needed”, reported the Telegraph.

“Markets have calmed somewhat, but the picture is still bleak,” a Treasury source told the paper. “People should not underestimate the scale of this challenge, or how tough the decisions will have to be. We’ve seen what happens when governments ignore this reality.”

The Financial Times (FT), meanwhile, was briefed by No. 10 that the government was exploring tax increases and public spending cuts worth up to £50bn a year to “fill a gaping hole in the public finances”. That figure comes from Treasury calculations “showing an initial fiscal hole of between £30bn and £40bn, which will require tax rises or spending cuts of about £45bn because attempts to fill it will worsen the economic outlook”, added the paper.

The FT noted that £50bn a year is around 2% of the current UK GDP and that reaching it primarily via spending cuts would see the return of “George Osborne’s austerity Budget of 2010”.

Put together these briefings appear to be a “concerted effort” by Downing Street to dampen spirits following “upbeat coverage suggesting that the size of the fiscal hole will end up being smaller thanks to the Sunak-Hunt ‘dullness dividend’”, said Politico’s London Playbook.

What next?

It appears that government policy will remain influenced by the financial markets for some time. Business “can cope with any shade of government so long as it’s clear in its direction and competent both in execution and in speaking the language markets understand”, said The Spectator’s Martin Vander Weyer.

Sunak as chancellor “scored high marks for competence; the financial community recognises him as one of their own”, he added. “But the capriciousness of events, politics and global economic forces waits to knock him off course.”

The government faces “a long and grinding slog to convince investors that gilts are once again a safe bet”, said The Economist, with the head of the Debt Management Office Robert Stheeman telling the Treasury Select Committee earlier this week that government borrowing costs could rise again as a result of the Bank of England’s quantitative tightening programme.

The Bank’s Monetary Policy Committee will meet to set interest rates on Thursday and the “£50bn figure would shrink if the Bank can persuade financial markets that the government’s fiscal plans allow it to raise interest rates by less than previously thought to tackle high inflation”, said the FT.

Sunak’s pledge to restore fiscal and financial responsibility may calm markets, but “standing by that commitment as the central bank raises interest rates to curb inflation makes a serious recession possible if not probable”, said Bloomberg.

By stabilising markets, Sunak and Hunt have bought themselves time and “will hope that market prices improve further, but the outlook is still much more difficult for the government than it appeared in the spring”, added the FT. “The autumn statement might have been delayed from Halloween, but it is still likely to frighten many voters and Tory MPs when it is delivered next month.”

Tory MPs are in “open revolt” against Liz Truss and her plan for “growth, growth, growth”, according to reports.

Conservative politicians are “openly plotting how to put this government out of its misery”, an unnamed MP told the i news site, following a meeting between the prime minister and the 1922 Committee that backbenchers described as “painful”, “awful”, “funereal” and “brutal”, according to The Spectator.

Amid ongoing economic turmoil following Chancellor Kwasi Kwarteng’s mini-budget, many MPs and commentators are wondering whether Truss can deliver the economic growth that has been at the heart of her message. Others are questioning whether growth is the right goal for the country.

What did the papers say?

Economic growth refers to an increase in a country’s gross domestic product, or GDP – the total value of goods and services produced over a specific period. It matters because “sustained rises in GDP have been shown, over the course of history, to improve our health, our wealth and our happiness”, said Andy Haldane, the Bank of England’s chief economist.

In the post-war period there was a “good reason” to pursue growth, wrote Michael Jacobs in The Guardian, because it gave us “falling unemployment, rising incomes, lower inequality, higher tax revenues to pay for public services”, and “even some environmental improvement”.

However, said Jacobs, professor of political economy at the University of Sheffield, growth averaged around 2% a year from 2010 to 2019, “but disposable income has barely increased”. Why? Because the rise of “rentier capitalism”, in which ownership of land, property and company shares are “highly concentrated”, has meant the benefits of economic growth flow mainly to asset holders, “whose riches grow with no labour or effort on their part”. As a result, he believes “the obsession with GDP has to change”.

Matthias Schmelzer, at The New Statesman, also thinks Truss’s “focus on economic growth is politically misleading, economically wrong-headed and profoundly outdated”. The economic historian and social theorist believes her plan is “concealing a radical agenda of austerity” that will lead to fewer planning regulations and “lower social and ecological standards”.

Even if these policies were to achieve growth, it would be “a kind of economic expansion that curtails the prosperity of middle-income voters and further aggravates the ecological crisis”, he argued.

At the Financial Times, Tim Harford said that “a fashionable line of attack against Liz Truss’s single-minded focus on growth” is “what about the poor? What about the planet?” But he thinks this is “misguided”.

She is “absolutely right to believe that economic growth should be her top priority”, said Harford. “The problem is that she seems to have no idea how to go about it.”

He explained that it is “striking how countries with a high GDP also have flourishing citizens”.

“Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera… somehow, people who live in richer countries are likely to be enjoying more of the good stuff.”

Michael R. Strain, director of economic policy studies at the American Enterprise Institute, agreed that Truss is “absolutely right to focus on economic growth” because Britain is the only G7 country with a smaller economy today than in the fourth quarter of 2019, before the pandemic.

Writing for The Washington Post, Strain said that slow growth means “fewer opportunities for economic advancement”, “conflict over distribution”, as well as workers’ talents being “underutilised and energy untapped”. Ultimately, he wrote, slow growth means “dimmed aspirations and more modest dreams for the future”.

What next?

Truss and her chancellor hope to restore public, political and economic confidence in their plans. During the financial turmoil that followed his mini-budget on 23 September, Kwarteng said he would set out his economic plan and an independent forecast of the nation’s finances on 23 November.

Following an outcry from backbenchers and the markets, he said he would announce his plan on 31 October. This will “set out how he will fund tax cuts and reduce debt after his mini-budget sparked market turmoil”, said the BBC. An independent forecast of the UK’s economic prospects will be released at the same time.

Sky News today suggested that talks were under way in Downing Street “over whether to reverse parts of mini-budget”, but Truss’s aim for “growth, growth, growth” is unlikely to change.

Pension funds are facing a “cliff-edge” after the Bank of England (BoE) warned that its emergency intervention in the UK’s debt market will come to an end on Friday.

BoE governor Andrew Bailey had been urged to extend the central bank’s multi-billion-pound bond-buying programme, which has been propping up pension funds. But in a “blunt” statement on Tuesday evening, he told investors they had three days to prepare for the support to end, said the BBC.

Speaking to the BBC after his statement, Bailey said that pension funds had “an important task” to ensure they were resilient. “I’m afraid this has to be done for the sake of financial stability,” he added.

The pound dropped sharply against the dollar following the announcement, hitting $1.09 for the first time since the Bank announced its emergency intervention on 28 September, as investor hopes for further intervention were “dashed”, said the broadcaster.

But the Financial Times (FT) suggested the BoE could be prepared to extend the emergency bond-buying scheme “if market conditions demanded it”. Pension funds have said that they need more time to “shore up their derivative strategies” before central bank support ends, to avoid a repeat of the sell-off that forced the Bank to intervene last month, said the paper.

What did the papers say?

“Final salary pension schemes running out of cash was not a crisis that many people had predicted,” said the Investors’ Chronicle. The crisis was sparked late last month when chancellor Kwasi Kwarteng announced a series of unfunded tax cuts in his so-called ‘mini-Budget’.

In the end it ended up as a somewhat larger fiscal event, with Kwarteng’s mini-Budget “sparking investor fears over the UK’s financial stability”, said the BBC. It resulted in a “major sell-off” in the bond market, leaving pension funds – which are major investors in government bonds – stuck in a “doom loop”, where they were forced to sell off more government bonds, reportedly leaving some pension funds close to collapse, according to Politico.

It was only when the BoE stepped in and pledged to buy up to £65 billion of government bonds, known as gilts, until 14 October that the “doom loop” stopped and pension funds “gained time to meet cash calls and stop the contagion from spreading”.

The problem originated from what are called liability-driven strategies (LDI), “a term that refers to investment strategies now commonly used by pensions to manage their liability risks” and which “typically include hedging against interest rate and inflation risks” by using government bonds as leverage, explained Investors’ Chronicle.

When the value of bonds fell, investment banks called on these LDI funds to put up assets or cash as securities for loans. Pension funds also began selling their liquid assets, including government bonds, forcing prices to drop even further. The BoE eventually stepped in to stabilise this “vicious circle”.

What’s next?

The BoE has indicated it is unwilling to become a “permanent backstop” for the City which “steps in whenever there is a bit of turmoil”, said The Guardian. This ultimately creates a “moral hazard” that encourages “risky behaviour”. Setting a time limit of the end of the week allows pension funds to “untangle their complex derivative positions, dust themselves down and get back to providing workers with their annual retirement incomes”.

But the BoE has “privately signalled to some bankers” – despite Bailey’s comments on Tuesday – that it could be willing to extend the emergency bond-buying programme past Friday’s deadline. The FT reported that “several bankers” had been briefed by the central bank that officials were closely watching whether LDI managers “have been able to build up enough cash reserves to enable their clients to meet margin calls” before deciding whether to extend support.

Ultimately, the drop in bond prices is likely to help pensions in the long run, said The Guardian. Once pension schemes have “succeeded in solving their liquidity issues”, it means the bonds they hold will “pay a higher rate of interest and over the longer term”.

But it is in the short term that pension funds could face difficulty, as schemes “face the choice of selling higher returning assets to keep their hedges in place, or jettisoning or reducing the protection of the hedging strategy”. If the latter were to happen, then it would “leave pensioners exposed to future swings in rates and inflation”, said the FT.

It’s not every day that the Bank of England is forced to step in and head off a “material risk to UK financial stability” with an emergency £65bn intervention in the bond market. But at least we got to understand what the acronym LDI stands for, said Alistair Osborne in The Times.

Little more than a week ago, to everyone beyond a few pointy-heads in the pensions industry, it would have been anyone’s guess. Large document imaging? Liquid damage indicator? Let’s do it? But then along came Trussonomics, and suddenly “liability driven investment” – and its terrifying potential impact on our pensions – became part of the lexicon.

Markets ‘barely dodged’ a collapse

By some accounts, markets “barely dodged a Lehman Brothers-like collapse – but this time with your mum’s pension at the centre of the drama”, said Alexandra Scaggs and Louis Ashworth on FT Alphaville. What on earth happened? In short, the huge sell-off of UK government bonds following the “mini-Budget” prompted a “massive move” in gilt yields (the interest rates paid on them, which move inversely to price).

The benchmark 30-year gilt yield “spiked” by an extraordinary 1.2 percentage points in just three days. Ordinarily, you might assume that pension funds, which are big investors in long-dated bonds, would profit from this. But their LDI arrangements – insurance policies intended to smooth the returns paid to pension holders – got in the way.

Falling bond prices “had the effect of forcing pension funds to sell gilts, to honour bets they had made that prices would not fall”, said The Times. “The more prices fell, the more they had to sell, threatening to send the market into a downward spiral.” It took the BoE’s vast intervention to halt it.

Few investors ‘had this on their crisis bingo card’

“The most interesting part of any crisis isn’t the blow-up that you expected – it’s the one you didn’t see coming,” said Cris Sholto Heaton on MoneyWeek.com. “Very few investors had this on their crisis bingo card.”

Yet the risks had been flagged, said Simon Foy in The Daily Telegraph. Lord Wolfson, the boss of Next, was so worried about the looming “time bomb” that Next wrote to the Bank in 2017 to raise the alarm. Yet it seems to have remained a Threadneedle Street “blind spot”.

With calm restored in bond markets – at least until the cliff-edge of 14 October when the Bank’s bond-buying stops – there have been calls for an inquiry, said Charlie Conchie in City AM. But the industry seems unbowed. PwC’s global pensions chief claimed fears of “a wave of insolvencies” were an “overreaction”.

Meanwhile, the biggest provider of LDIs, Legal & General, insisted the chaos had had a “limited economic impact on its businesses”. Analysts at UBS, however, warned that there was still a risk of a “meltdown”.

Prime Minister Liz Truss and her chancellor Kwasi Kwarteng are refusing calls for a U-turn after their radical tax-cutting “mini-budget” plunged the markets into turmoil this week.

The government’s controversial fiscal strategy, which included plans to implement some £45bn worth of tax cuts, prompted the pound to fall to an all-time low against the dollar and raised the prospect of further interest rate hikes from the Bank of England (BoE) to deal with spiralling inflation.

In a highly unusual move, the BoE was forced to announce a £65bn emergency intervention to avert an economic crisis in the wake of the mini-budget, buying billions of pounds’ worth of government bonds to prevent people’s pensions being put at risk.

Truss defended the plans in a round of broadcast interviews on BBC local radio yesterday, describing the mini-budget as “decisive action” that had to be taken in order to “get the economy moving”.

But both Truss and Kwarteng today met the government’s independent economic forecaster, the Office for Budget Responsibility, which has demanded a “rethink” of the government’s fiscal strategy, according to The Times.

Meanwhile, Labour is enjoying its largest poll lead since the Tony Blair years, after a YouGov survey found that 54% of voters would back Labour in a snap general election with only 21% supporting the Tories. The 33-point lead is the party’s highest in almost three decades.

To find out how closely you’ve been paying attention to the latest developments in the news and other global events, put your knowledge to the test with our Quiz of The Week.

Need a reminder of some of the other headlines over the past seven days?

• Two gas pipelines between Russia and Germany, Nord Stream 1 and 2, have been damaged in explosions, with several European leaders quick to claim that sabotage was a likely cause.
• An investigation into the death of Marc Bennett, a British travel industry boss, in Qatar has reportedly uncovered fresh evidence that he was detained and tortured by the country’s secret police in the final weeks of his life.
• Vladimir Putin’s plan to send 300,000 new conscripts to support his war in Ukraine is facing increasing resistance in Russia as anti-mobilisation protests spread across the country.

With the nation’s focus on the death of the Queen and accession of King Charles III, the spectre of imminent UK recession has slipped under the radar.

Amid the outpouring of grief for Her Majesty, it has “been easy to disregard the warning from economists that next Monday's funeral for the late Queen – an additional bank holiday, with workplaces and shops closed – will tip the UK into a technical recession”, wrote Allegra Stratton for Bloomberg.

“This must be the most dismal collision of economic analysis with national spirit,” added Stratton, who served as Downing Street press secretary under Boris Johnson.

The UK economy contracted by 0.1% in the second quarter of the year, and latest Office for National Statistics figures show that GDP climbed to just 0.2% in July – fuelling fears of a further decline in the third quarter, which would signal recession.

Will the Queen’s funeral be the tipping point?

Economists are warning that the closure of businesses nationwide for the funeral bank holiday, combined with the impact of the ten-day mourning period on consumer sentiment, “raises the risk of Britain’s already-faltering economy falling into a recession sooner than expected”, The Times reported.

According to the London Evening Standard, the combined cost to the UK economy of “funeral expenses, bank holidays and the coronation of King Charles III next year” could be £6bn or more. Experts estimated the hit to the economy of Monday’s bank holiday alone would be around £2bn.

The Bank of England last month predicted that a recession would begin in the fourth quarter of 2022, as businesses and families continue to struggle with steep price hikes after inflation hit a 40-year high in June.

Economists across the City are now revising their models as the Queen’s death adds “further uncertainty to forecasts”, said The Times.

Investment bank Panmure Gordon had expected that UK GDP would grow by 0.1% in the current quarter, but is now predicting -0.1%. Deutsche Bank also expects GDP growth to be either negative or flat, after previously predicting 0.2% growth.

What about Liz Truss’ energy plan?

The new prime minister suggested during her leadership campaign “that her economic agenda could avoid recession”, said Kate Andrews in The Spectator. “But one of the (many) gambles attached to these comments was what had already happened to the economy before she entered No. 10.”

Truss announced last week that energy bills for everyone in the UK would be frozen at £2,500 for two years, at a cost of around £150bn.

But some economists have warned that Truss’s energy support package “is unlikely to lift it out of its slump any time soon”, City A.M. reports.

“The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession,” said Paul Dales, chief UK economist at consultancy Capital Economics. “The government’s utility price freeze is unlikely to change that.”

Not everyone agrees, however. Bloomberg analysts Andrew Atkinson and Philip Alrick wrote that “we think the government’s £150bn energy support package means the recession won’t last over the winter”.

What is the long-term outlook?

Looking further ahead, the picture becomes even less clear. Truss’s “plan is likely to curb inflation but force the Bank of England to keep interest rates higher for longer, potentially leading to a contraction next year”, said Stratton on Bloomberg.

At 1.75%, interest rates are currently at their highest level since December 2008. The Bank’s Monetary Policy Committee had been widely expected to further raise rates to up to 2.25% this week, but the decision has been pushed back to 22 September following the Queen’s death. The Bank has already lifted borrowing costs six times in a row.

US investment bank Goldman Sachs has predicted that rates may reach as high as 3.25% by the end of this year, while consultancy Capital Economics is a predicting a peak of 3%.

And some experts have predicted that interest rates may be hiked to at least 4.25% by the middle of 2023, in a bid to prevent the bill for energy support from stoking inflation – heaping further pressure on consumers.

The UK is suffering higher inflation than any other G7 country as price rises reach a 40-year record.

Britain’s consumer price inflation hit 10.1% in the year to July, the “biggest leap” since 1982 and “well ahead” of the rate in fellow members of the group of advanced economies, said The Daily Telegraph.

The double-digit increase “exceeded economists’ expectations” that the UK rate would “edge up” to 9.8%, said the Financial Times, and “highlights the difficult task” that the Bank of England (BoE) faces in trying to tackle the inflation crisis.

What is driving inflation?

High food prices were the “main driver of the spike”, which rose at an annual rate of 12.7% in July, up from 9.8% in June, said Politico.

According to figures from the Office for National Statistics (ONS), the annual rate of inflation for food and non-alcoholic beverages has not been this high since August 2008, during the global financial crisis, when it reached 13.2%.

The CPIH (the Consumer Prices Index including owner occupiers’ housing costs) has also risen by 8.8% in the 12 months to July 2022, up from 8.2% in June. The largest contributor to that increase came from electricity, gas and other fuels, transport, and food and drink, said the ONS.

The increases are set to “pile more pressure on consumers already facing the steepest real pay cut on record”, said The Telegraph, which added that the rises “come ahead of another jump in energy bills this winter”.

How does the UK compare with the G7 and rest of Europe?

While “all advanced economies” have seen a rise in inflation, it has been “stronger in the UK than in other G7 countries and most European nations”. said the FT. This is due to the UK’s “greater use of gas, the underlying strong growth in spending last year, pay growth in the private sector rising above 5% and the ease with which companies expect to pass on higher costs to customers”, explained the paper.

In other G7 nations, American and German inflation stands at 8.5%, while Italy’s rate is 8.4%, Canada is at 7.6%, France on 6.8%, and Japan on 2.4%.

Speaking to The Telegraph, Martin Beck, chief economic adviser to the EY Item Club, said that the UK is facing a combination of the pressures found in America, as well as those in the eurozone, ultimately resulting in higher inflation than either.

Beck explained that the UK was suffering from both America’s “excess demand for workers” combined with Europe’s “massive energy bill issues”, which have combined to give us the “worst of both worlds when it comes to inflation”.

“Different countries have different policies in place when it comes to holding down energy bills. The UK approach is more to give households direct support, like cash, when countries like France have done more in holding bills down directly,” Beck added.

With inflation set to peak at 13% later this year, according to predictions from the BoE, financial experts expect the Bank to raise interest rates again, with another 0.5% hike expected next month.

Debapratim De, a senior economist at Deloitte, told Yahoo Finance: “With inflation above 10% and widely expected to rise further as energy bills increase, base interest rates look fairly low at 1.75%. We expect swift action from the BoE with the base rate potentially doubling by this time next year.”

The Bank of England governor Andrew Bailey recently received an email from a member of the public begging him to “please, please, please be more cheerful”. The best he could come up with, said The Economist, was: “We are not doomed, far from it. But we are in difficult times.” He’s not kidding. For the first time since polling began in 1999, more people are “dissatisfied” with the Bank’s performance than satisfied. And “the political environment” has become ever more “hostile” – with the frontrunner to be the next PM, Liz Truss, attacking the Bank for excessive money-printing and “suggesting that its mandate needs toughening up”.

Even by his own standards, Bailey delivered “an unusually apocalyptic economic outlook” as he announced the biggest interest-rate hike for 25 years, said Marcus Ashworth on Bloomberg. After the Truss camp accused the Bank of “talking Britain into a recession”, tensions were further fuelled by Business Secretary Kwasi Kwarteng, who warned that “something has gone wrong” on Threadneedle Street, said Tony Diver in The Daily Telegraph. Under plans being floated, the Bank could be told to abandon its 2% inflation target and ordered to target nominal GDP (the size of the economy in cash terms) instead. It sounds a minor tweak, but it actually spells a “radical” overhaul.

There’s no doubt the BoE needs it, said Ambrose Evans-Pritchard in The Daily Telegraph. Whatever new model Truss suggests “could not be worse” than the “dog’s dinner of corrupted New Keynesian fallacies” currently dictating BoE policy. By worshipping at the altar of “inflation expectations”, and ignoring money supply signals, the Bank wildly underestimated the inflation danger. Now it is compounding the error with “a double-decker” interest-rate rise just as the inflation cycle has “already rolled over” and the threat is receding.

Yet there are actually plenty of reasons for maintaining the status quo, said Valentina Romei in the FT: not least the fact that the Bank has a pretty good long-term track record of hitting its mandated inflation target. Moreover, any call for a review by the Government is likely to raise “questions about the BoE’s independence” – and that would certainly worry investors. Truss’s “frankly bizarre suggestion that the Bank should target money supply makes little sense to anyone who remembers the lesson of the 1980s”, said The Economist: namely, that “the relationship between money supply and inflation is too unstable for it to work”. In circumstances like these, “a sensible politician ought to be grateful” for the Bank’s monetary policy independence – “and leave it well alone to take unpopular decisions”.

The Bank of England said yesterday that the UK will fall into recession as it unveiled the biggest rise in interest rates for 27 years.

In an alarming set of forecasts for the economy, the bank said inflation would surge above 13%, causing the worst squeeze on living standards for more than 60 years.

It predicted that the UK would enter a recession in the last three months of this year, and that it would turn into the longest downturn since 2008. The economy is expected to “keep shrinking until the end of 2023”, said the BBC.

What the editorials said

“There is little uncertainty about what lies in store in the short term,” said The Times. The rise in interest rates and soaring energy prices will cause “the steepest decline in living standards on record, with household disposable income forecast to fall by 3.7% over the next two years”.

The Telegraph said that the Bank of England’s outlook is “grim” and “it is possible that even the Bank’s latest forecasts could underestimate the misery to come”. The Daily Mail agreed, warning its readers that “even tougher times are hurtling down the track for British families”.

The Guardian questioned the effectiveness of the Bank’s move to hike rates, arguing it will “achieve precisely zero” in bringing down the price of wheat or oil on global markets. “All higher rates do in this scenario is add to the economic pain by making mortgages and credit card bills another worry for families already stressed about paying for energy and food,” it said.

What the commentators said

“If global energy costs remain where they are,” said Faisal Islam, economics editor of the BBC, the recession “will then last the whole of next year, with inflation barely below 10% even in a year's time”. This would not only affect householders but those in power, too. “Make no mistake, a forecast such as this would mean a wrecking ball to the forecasts for government borrowing,” he added.

The situation will make keeping a roof over your head harder, said Vicky Spratt, housing correspondent for The i newspaper. She wrote that rising interest rates mean we can expect “rent rises, rising monthly mortgage repayments and higher interest rates for first time buyers”.

What happens next for the UK economy will depend largely on who wins the Conservative leadership election, said ITV’s Robert Peston. “For Tory members, the choice for their leader and the UK's prime minister would be between lower immediate taxes with Ms Truss or lower immediate interest rates with Mr Sunak,” he wrote.

However, he added, “for the avoidance of doubt, neither Mr Sunak or Ms Truss are promising anything that would persuade the Bank of England the UK can escape a significant recession, a significant contraction in national income, this year”.

Are there any positive signs?

Glimmers of hope are few but those worried by rising interest rates might be encouraged by the news that market expectations of future rises are falling.

Writing in The Spectator, Ross Clark noted that the forward yield curve showed that while in June markets were expecting the Bank of England’s base rate to peak at 3.59% in July 2023, this week markets are expecting rates to peak at 2.85% in June 2023 – “quite a chunky downwards revision”.

And some prices are already beginning to fall. The Guardian said earlier this week that the trend in underlying inflation – which excludes fuel, food, tobacco and alcohol – is “encouraging”, with core inflation falling for two months in a row from 6.2% in April to 5.8% in June.

There are also suggestions that the UK will recover quickly once the crisis eases. “Our economy is in far better shape to bounce back once this global crisis is over,” said the Daily Mail, “and with unemployment low, we should be better placed than most European countries to recover”.

The last day to spend old £20 and £50 paper notes is fast approaching before they are replaced by the new polymer versions.

“Check your pockets, wallets, and the back of your sofa,” said the Evening Standard, warning that there are fewer than 100 days left to use the old notes.

According to the Bank of England, the majority of banknotes have been replaced but there are still more than £6bn worth of paper £20s and £8bn worth of paper £50s in circulation. After 30 September, these will no longer be legal tender.

Why are £20 and £50 notes changing?

The latest polymer banknote to be issued was the £50 note “featuring Bletchley Park codebreaker and scientist Alan Turing” last year, said Sky News. “The Turing £50 completed the Bank’s ‘family’ of polymer notes, with all of its denominations – £5, £10, £20 and £50 – now printed on polymer.”

The first plastic £20 note, featuring artist JMW Turner, was issued in February 2020. The £10 polymer features author Jane Austen, while the £5 shows war-time prime minister Sir Winston Churchill.

Sarah John, chief cashier at the Bank of England, said the change was an “important development” because “it makes them more difficult to counterfeit”. The plastic notes “are also more durable – something you’d know if you are in the minority of nostalgic people who still use them”, said City A.M.

What should you do with old notes?

Old notes can be spent on goods and services in the usual way up until 30 September. Or, “if you’re not feeling like it, given we’re living in a cost-of-living crisis with inflation on the rise, feel free to deposit them at the bank or at the post office”, added City A.M.

What happens after 30 September?

The old notes will still be accepted as a deposit into an account by “many banks and some post offices”, said the Evening Standard.

The Bank of England will also exchange them in person at its premises in London or by post.

The Bank of England has not increased interest rates since August 2023, raising hopes that the cost of borrowing may have peaked.

Rates were held at 5.25% for the fourth consecutive month at February’s meeting of the Bank's Monetary Policy Committee (MPC), while the latest Office for National Statistics data shows inflation rose slightly from 3.9% to 4% between November and December.

The Bank said there are signs "the restrictive stance of monetary policy is weighing on activity in the real economy and is leading to a looser labour market", so there was no current need to raise rates further.

While the freeze was expected by many, attention is now likely to turn to when interest rates will be cut.

Inflation remains at double the 2% target, said The Times Money Mentor, despite falling "significantly", which was the "main objective" of the interest rate rises.

Most analysts think rates have peaked, added the financial website, and will "soon start to fall".

What has the Bank said?

There was a split vote at the latest MPC meeting, with six members backing holding rates, two voting for a rise and one for a cut.

The single vote for a cut is a "powerful signal" that the central bank is getting closer to taking action, said The Guardian. 

But the Bank's governor Andrew Bailey said: "We are not yet at a point where we can lower interest rates." The Bank has to be "more confident" that inflation is heading towards its 2% target, he said.

Bailey also warned the Treasury Select Committee in November that the markets are currently "underestimating" the "potential persistence" of inflation and its risks.

He had told a conference hosted by the Central Bank of Ireland in Dublin earlier that month that "it's really too early to be talking about cutting rates".

A "persistent barrier" to bringing down inflation is the "strong demand for workers, which is pushing wages higher", wrote The Guardian's Phillip Inman, and the "slow decline in food inflation" and "rise in the cost of services".

 How will savers and mortgage holders be affected? 

Higher interest rates and falling inflation means savings rates are more "competitive", said Moneyfacts.

More than 900 savings accounts currently beat inflation, added MoneyWeek, but you need to "grab these deals fast" as deals are often pulled from the market quickly.

There is also good news for homeowners, with major lenders cutting their mortgage pricing amid falling inflation and the freeze on the base rate. 

Mortgage rates have fallen "significantly" since peaking at nearly 7% in August 2023, said Which? Some deals are priced at below 4% but the recent "surprise rise in inflation" and higher swap rates "may prevent mortgage rates from falling quickly", the consumer watchdog added.

What next?

The Bank's MPC will announce its next base rate decision on 21 March.

The Bank predicted in August that inflation would "continue to fall in 2024, and reach our 2% target by early 2025".  

And "as soon as inflation is back under control", said The Times Money Mentor, "the Bank is likely to bring interest rates down".

The Bank of England has warned that the UK is expected to face its longest recession since the global financial crisis.

In its sixth consecutive increase, the Bank yesterday raised interest rates by 50 basis points to 1.75%, the single largest rise since 1995. In its Monetary Policy Summary for August, it said GDP growth is “slowing”, and the latest gas price rises have led “to another significant deterioration in the outlook for activity” in the UK and Europe.

The UK is expected to experience a recession in the final months of the year, as inflation rises above 13%. Households’ post-tax income will “fall sharply in 2022 and 2023, while consumption growth turns negative”, the report said.

Governor of the Bank of England Andrew Bailey told BBC Radio 4’s Today programme that the “real risk” it is responding to “is that inflation becomes embedded and it doesn’t come down in the way that we would otherwise expect”.

Andrew Sentance, a member of the Bank’s rates-setting committee during the 2008 financial crisis, told BBC Breakfast that the UK is heading for a few years in which “household incomes in real terms are squeezed more severely than we’ve seen in other times since the Second World War”.

What could tip the economy into full recession?

“Multiple factors in play have contributed to the current financial crisis facing the UK,” said Unbiased. “In isolation, they are big challenges but not a disaster. However, a combination of the successive lockdowns in the UK slowing down the economy, along with Russia’s invasion of Ukraine damaging the international market price of gas and oil, mean that the current volatile climate could be set to take another downward turn.”

“The data chimes with widespread warnings that the economy faces a prolonged period of low growth, caused by a cost of living crisis that is only forecast to intensify in the months ahead as energy bills rise to stoke inflation further,” reported Sky News.

City A.M. said: “Firms have retrenched in response to Russia’s invasion of Ukraine, high inflation and ongoing supply chain disruption souring the trading environment, dampening the UK’s growth prospects.” The spike in energy prices as a result of Russia’s restrictions on gas “will exacerbate the fall in real incomes for UK households”, the Bank said yesterday.

Consumers are rapidly reducing their spending in the face of a “once in a generation” cost-of-living squeeze, George Lagarias, chief economist at accountancy firm Mazars, told The Guardian.

“For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one.”

What would a recession mean for the country?

Two successive quarters of decline in gross domestic product (GDP) may sound abstract, but a recession has real-life consequences on everything from job prospects and housing to investments.

“Businesses are likely to try and save money during a recession, meaning jobs could be lost, and with spiralling inflation and energy price hikes, wages may be unable to cover the cost of everyday essentials,” said Unbiased.

The global financial crisis of 2008 resulted in UK unemployment levels reaching 10%. However, “no one can predict the severity or the length of [a recession], making it difficult to outline the tangible impact on UK workers”, said the financial advice site.

Forbes reported that with more people unable to pay their bills during a recession, “lenders tighten standards for mortgages, car loans and other types of financing”. This means you may need a better credit score or a larger down payment to qualify for a loan than would be the case during more normal economic times.

Investments in assets such as stocks, bonds and property can lose value in a recession, cutting income and savings, and denting retirement funds too, it added.

As well as the effect on lower-skilled and lower-paid workers, recessions “also impact young people disproportionately, as we saw from the recession in 2008”, said HuffPost UK.

Are there any positives?

“There are arguments that recessions are part and parcel of the economic cycle,” said the i news site. “They can lead to a clearing out, or what some economists call a reset or ‘correction’.”

This can have knock-on positive effects for some people or sectors. High inflation, for example, such as that seen in the early 1980s, usually leads to higher interest rates, which is good for people with savings.

The recession of the early 1990s, meanwhile, led to lower house prices and interest rates, allowing Generation X and younger Babyboomers to get on the property ladder.

What about the rest of the world?

The risk of the US and Europe “sliding into recession” has “picked up sharply” according to economists who spoke to the Financial Times ahead of the G7 summit in Bavaria this weekend.

Holger Schmieding, chief economist at Berenberg Bank, told the paper that the balance had now “tipped” in favour of an economic contraction next year in the US and Europe, arguing that “what used to be a rising risk has now turned into the base case”.

The FT said that economists had become “increasingly pessimistic” over the chances of a recession, following the Federal Reserve’s decision to increase interest rates to counter “soaring” inflation, and as concerns mount over Europe’s gas supply in the coming winter. The International Energy Agency warned this week that Europe must plan now for winter without any Russian gas exports.

“US recession risks are uncomfortably high and rising,” said Mark Zandi, chief economist of Moody’s Analytics, who spoke to the paper. “I would put them at 40 per cent in the next 12 months, and more or less even odds over the next 24.” Zandi added that Europe was in an even worse situation.

“To avoid recession, the global economy needs a bit of luck and for the economic fallout from the coronavirus pandemic and Russian aggression to wind down quickly, along with some deft policymaking by the Fed and other central banks,” he said.

How long will it last?

The Bank has set off “the most piercing of warning sirens”, said the BBC’s economics editor, Faisal Islam. “The big shock” is its prediction that a recession could last “as long as the great financial crisis" and be "as deep as that seen in the early 1990s”.

If global wholesale energy costs remain as they are currently, then the recession is expected to last the whole of next year, “with inflation barely below 10% even in a year’s time”. And with the Tory leadership contest still underway, Islam explained that this “is the sort of forecast that in other circumstances might have prompted an immediate emergency Budget”, but might instead “upend all the plans” the contenders have announced during their campaigns.

With the UK economy expected to shrink for more than a year, Islam described this as “a proper full fat recession”, and a “textbook example” of stagflation.

Inflation remains at historically high levels despite dipping slightly to 10.7% in November.

An “easing in the rise in petrol prices” has helped lower annual inflation rates which reached 11.1% in October, said the Financial Times. The figure was “better than an expected 10.9%” rate, said the paper, adding that some economists think that the inflation rate has “now probably passed its peak”.

Although smaller petrol price increases have contributed to a downward momentum, the Office for National Statistics (ONS) said this had been partially offset by continued sharp price rises in restaurants, cafes and pubs.

The dip in inflation will do little to help those feeling the bite of the cost-of-living crisis, as “soaring prices” see “low-income households struggle to afford basic supplies and energy bills”, said LBC. The latest figures from the ONS reveal a staggering rise in food prices, with costs rising by 16.5% from last year.

But the fall in inflation will, however, “ease pressure” on the Bank of England (BoE) as the central bank prepares to make its latest interest rate decision, said The Telegraph.

Experts believe the bank will raise its key interest rates by half a percentage point to 3.5% – its ninth consecutive rise. But the rate rise could leave home-owners feeling the pinch, with the BoE’s Financial Stability Report predicting that the average mortgage repayments could surge by £3,000 a year.

What is inflation and how is it measured?

Inflation is a measure of the rate at which a range of prices rise over a given period of time.

In the UK, inflation is measured by the ONS, which tracks the prices of 700 everyday items known as the “basket of goods”.

The basket of goods is “constantly updated”, said the BBC. Items including tinned beans and sports bras were added in 2022, to reflect a “rising interest in plant-based diets and exercise”.

The price of that basket “tells us the overall price level”, or CPI, explained the Bank of England’s website.

To calculate the rate of inflation, the cost of the basket – the level of the CPI – is compared with the cost on the same date last year. The change in the price level over the year is the rate of inflation.

Why is inflation so high right now?

Britain’s official rate of inflation has been rising for a number of reasons, according to the BoE.

The UK is struggling with runaway prices after being “hit by a series of external shocks”, said ITV News. Difficulties in getting goods to customers as economies worldwide recover from the pandemic has pushed up the price of products, especially for imported goods.

The Russian invasion of Ukraine has also led to hikes in food and energy prices.

But the governor of the BoE said in a letter to the Treasury in September that “not all of the excess inflation can be attributed to global events”.

The Bank says inflation is starting to be generated domestically in the UK, as companies raise their prices and workers ask for higher wages, which in turn leads to higher costs.

Wages have risen at their “fastest rate in more than 20 years” but continue to “lag well behind the soaring cost of living”, said the BBC’s business reporter Daniel Thomas. Wages rose to 5.7% in the year to September, “the fastest growth since 2000”, but in real terms, wages fell by 2.7% because of soaring inflation.

What can be done to tackle inflation?

The “Goldilocks and the Three Bears analogy” is a useful tool when trying to understand why inflation is important, said HuffPost. If inflation is too low, economic growth is “cold” and the economy won’t grow. Too high, and the economy is too “hot” and will grow too quickly – leading to rocketing prices.

“Much like that third bowl of porridge”, the ideal inflation rate is around 2%, keeping inflation low and stable, which is “just right” for the economy.

The BoE’s “traditional response” to rising inflation is to raise interest rates, said the BBC. Although this can benefit savers, “some people with mortgages see their monthly payments go up”.

However, because much of the UK’s current inflation is caused by external factors, such as rising global energy prices, “there is a limit as to how effective UK interest rate rises can be in curbing inflation”, said the broadcaster.

Restricting prices – as with the energy price cap – to deal with “profit inflation” can also be “counterproductive”, wrote Will Dunn in The New Statesman, because it does “little to dampen demand”.

A change to tax may be the answer, he argued, with the current system favouring “the wealth accumulated from company profits” more than “income from work”. Not dealing with this problem “could cause a longer and deeper recession” for the UK.

Boris Johnson has been told by members of his cabinet that he must cut taxes this year if he is to save his ailing premiership.

The Times reported that Johnson has made a “broad pledge” to deliver tax cuts “once the economic outlook improved” in a bid to shore up support from his party after Monday’s damaging confidence vote.

The Guardian similarly reported that Johnson had included a promise of tax cuts in his “make-or-break” speech to backbench MPs as he battled for his job ahead of the confidence vote brought against him on Monday night. Johnson told MPs: “The way out now is to drive supply side reform on conservative principles and to cut taxes and to drive investment in the UK.”

Tax cuts on top of Tory ‘wish-list’

Senior Conservatives have accused him of failing to move quickly enough on the issue. They are “impatient” for Johnson to move from “campaign mode” to delivering what they believe to be a “proper Conservative agenda for government”, said Politico. And “top of the wish-list” for many influential backbenchers, and from the right of his party, is tax cuts for workers and business.

Esther McVey, a former cabinet minister, wrote in the Daily Express that the government needed “to find their way back to the Conservative path”. She added: “Covid turned them into socialists - removing even the most basic freedoms, spending money as if there was no tomorrow and putting up taxes to the highest levels in 70 years.”

Another minister who has publicly called for more tax cuts is Business Secretary Kwasi Kwarteng. He told the BBC yesterday that he wanted to see “very radical” tax cuts as soon as possible. Foreign Secretary Liz Truss also told The Times that the government’s agenda had to include “getting taxes down and getting the economy going”.

Damian Green, a former cabinet minister has also backed a demand from the Adam Smith Institute for the government to reduce the tax burden, reported The Guardian.

“One of the best ways to help people in a cost of living crisis is to cut the taxes they pay, whether personal taxes or the tax on goods and services,” said Green. “I urge this path on the chancellor of the exchequer.”

Chancellor to cut business taxes

But Chancellor Rishi Sunak has already played down chances of any interventions before the autumn budget, which is likely to focus mainly on cutting business tax.

“We will be setting out a range of tax cuts and reforms to incentivise businesses to invest more, train more and innovate more,” the chancellor said in an address to the Onward think tank last night.

The prime minister will also join Sunak in a planned economic speech next week, but the focus is likely to be on cutting corporation tax, rather than personal taxes for workers. According to The Sun, the government will say it is looking at ways to “offset next April’s corporation tax hike to 25 per cent for firms that invest in things like new technology”.

The National Insurance contributions starting threshold will also rise by £3,000 to £12,570 from next month.

People all over the world are feeling the effects of rising prices as the cost of living continues to rocket – but could the UK end up suffering the most?

While many countries are experiencing higher energy bills, supply chain disruption and the lingering effects of the pandemic, price pressures in the UK are “expected to be worse and longer lasting”, according to The Telegraph.

Kristin Forbes, a former member of the Bank of England’s Monetary Policy Committee, told the paper that “there’s about six factors that feed through into inflation and the UK hits every box”.

Exacerbating financial pain

The UK is set to experience a “toxic combination” of price drivers, said the paper, namely “an extremely tight jobs market, a plunging pound and higher inflation expectations”. And additional taxes on households being imposed by the government are also likely to exacerbate financial pain for many, “something few governments are daring to do at a time of soaring living costs”, said the paper.

Inflation is soaring and currently stands at about 7%, although the Bank of England (BoE) predicts it could reach as high as 10% this year due to rising energy prices. It’s a figure far from the Bank’s 2% target, a “key part” of its “price stability” mandate, said The Independent.

The BoE’s governor Andrew Bailey has said that the UK is in a “bad situation” with inflation, and has warned that a “very big income shock” could be about to hit British households. He added that due to the ongoing Russian invasion of Ukraine, there could also be an “apocalyptic” rise in global food prices.

Treasury select committee chair Mel Stride questioned whether Bailey had been “asleep at the wheel” when it came to rising interest rate pressures, but the BoE governor said that roughly 80% of forces pushing up inflation in the UK are being driven by global circumstances.

He added that the remaining 20% of issues affecting growth were due to the reduction in the workforce post-pandemic. “The scale and persistence of the fall has been very unusual,” said Bailey.

Crisis regions in Africa face famine

But while global price rises will certainly be sharply felt in the UK, the effects will be even more acute in already suffering “crisis regions” across Africa, said DW.

Teresa Anderson, the international climate policy coordinator at Actionaid, “told DW that many African economies are still reeling from the pandemic, climate change, humanitarian emergencies, or political and economic unrest” while the effects of the Ukraine war have only “exacerbated the situation”.

In Kenya, about “one-third of imported wheat comes from Russia and Ukraine”, said the paper, leading to rising bread prices and production costs. The 2022 Kenya Economic Survey found that most Kenyans are increasingly turning to their savings and loans to meet the rising cost of living.

Anderson also warned of “a famine of unimagined proportions”, especially in Zimbabwe, where daily living costs are rocketing. “In Zimbabwe, the price of gasoline has more than tripled, as has the price of cooking gas,” Anderson told the broadcaster. “The price of noodles has more than doubled.”

And in the Horn of Africa, parts of Kenya, Somalia and Ethiopia are already gripped by a hunger crisis thanks to an acute drought spanning three rainy seasons, leading to people “killing livestock, forcing people to leave their homes and increasing levels of child malnutrition,” said The Guardian.

The Russian invasion of Ukraine has only worsened the situation, “pushing up the price of staples such as wheat and sunflower oil, as well as fuel”, and leaving up to 20 million people facing hunger.

Patrick Watt, CEO of Christian Aid, has said that the war in Ukraine has turned the situation in the Horn of Africa into a “dire crisis”, with the people of Ethiopia, Kenya and Somalia “facing a crisis like no other”.

House price growth was already slowing in the build-up to the Autumn Budget, and prospects for higher property values seem further depressed now that the fiscal update is out of the way.

A “widely speculated” tax on homes worth above £500,000 was avoided, said Zoopla, which should “boost the market”. But property owners will soon have to contend with a new mansion tax from April 2028, and landlords with higher rates of income tax from April 2027.

Analysts expect these changes to have an impact on house price growth.

What’s happened to house prices?

Average property price growth has been “slowing since September amid Autumn Budget uncertainty,” said Estate Agent Today. The Land Registry house price index for the month showed average values fell by 0.6% between August and September, the first drop since April 2025. Other house price indices have registered lower levels of growth. The latest figures from Halifax show average property values were up just 0.6% between September and October 2025 and by 1.9% annually.

Despite clarity on property taxes in the Autumn Budget, house price growth still “looks set to continue rising at a slow pace”, said MoneyWeek.

How will mansion tax affect property prices?

Chancellor Rachel Reeves unveiled plans for a mansion tax, under a new High Value Council Tax Surcharge on homes worth more than £2 million.

Charges will range from £2,500 per year for eligible properties worth between £2 million and £2.5 million, and rise to £7,500 if your home is worth more than £5 million, with the tax rising by inflation each year.

This effectively introduces a “price limit on houses”, said Matthew Lynn in The Spectator and could “distort the market”.

Rightmove property expert Colleen Babcock suggested the tax would “disproportionately affect London and the south of England markets, which are still recovering from April’s stamp duty increase”. While there will always be a market for the highest priced, premium properties in the most popular locations, this tax is more “stifling than supportive of movement and growth” within the market.

Many of the affected owners are likely to be “asset-rich but cash-poor”, said The Times, so expect “plenty of serious appeals around the proposed revaluation exercise”.

What could cause a price crash?

There is no suggestion that house prices will crash, but the Office for Budget Responsibility has forecast that higher property income tax rates from April 2027 will “reduce house price growth by around 0.1 percentage points a year from 2028”.

Reeves announced that the basic rate of these property taxes will rise from 20% to 22% from April 2027. The property higher rate will increase from 40% to 42%, and the additional rate from 45% to 47%.

Furthermore, while fewer than 1% of properties in England are expected to be above the £2 million mansion tax threshold, it could have “knock-on effects for the rest of the market” if activity slows at the top, said ThisisMoney.

So what will happen to the price of your house?

Before the Budget, Savills was predicting growth of 4% in 2026, while Halifax estimated an increase of up to 3%. Some were more cautious – Zoopla forecast a “slight growth” of 1%, while Rightmove “downgraded” an initial estimate of 4% to 2%.

Post-Budget forecasts from the OBR have predicted that average house prices in the UK will rise from £260,000 in 2024 to just under £305,000 in 2030, growing at slightly below 3% in 2025 and averaging 2.5% annual growth from 2026, “broadly in line with average nominal earnings growth”.

The good news for homebuyers and also sellers is that the stamp duty system “remains intact”, said Zoopla. This means sellers won’t need to “adjust their asking prices to absorb an annual charge, preserving affordability for purchasers”, which may offer the market a “steadier footing”.

Meanwhile, the landlord income tax and mansion tax changes don’t come in until 2027 and 2028 respectively, added Rightmove, so movers and homeowners “have time to plan and assess what the changes might mean for them”.

This year marks the 25th anniversary of the Bank of England’s independence. But the celebrations may be muted in Threadneedle Street, said Russell Lynch in The Daily Telegraph. Uncomfortably for governor Andrew Bailey, the BoE’s silver jubilee coincides “with the greatest test of its credibility in a quarter of a century” – owing to an “inflationary tsunami” critics claim it failed to anticipate. Ahead of this week’s meeting, markets had priced in a 90% chance the Bank would be forced to make its first back-to-back monthly interest rate hike since 2004, taking the base rate from 0.25% to 0.5%. Many are betting on four more hikes this year. Bailey “bristled” when MPs on the Treasury Select Committee suggested he had got the “judgement call” wrong by not acting earlier. “But it is difficult to argue from a position of strength” when inflation, at 5.4%, is nearly treble the Bank’s 2% target, and could possibly run as high as 7% in April.

In fairness, Bailey wasn’t alone in failing to read the inflationary runes, said Alex Brummer in the Daily Mail. In fact, he was “the first central banker of out the blocks” – hiking rates in December when such measures are only now on the way in the US and Europe. And it isn’t really his fault that the British economy now faces a debilitating “double whammy of higher rates and higher taxes” that could knock the recovery for six; the greater blame lies with the Government’s insistence on ploughing ahead with its “fiscal squeeze”. Still, there’s no escaping the fact that the BoE has been “getting its forecasts badly wrong”, with “serious consequences for the management of economic policy”, said Andrew Sentance in The Times. The Monetary Policy Committee’s record has been “chequered” for a decade. “Diversity of debate” has faded away, communication is poor, and there’s been “no clear strategy for normalising UK monetary policy since the global financial crisis”. A “robust review” is urgently needed.

What matters most to the average Briton is what the rate rises will mean for their pockets, said Hugo Duncan in The Mail on Sunday. A hike to, say, 1.5% doesn’t sound too scary, but analysts warn it may come as “a shock” to about ten million British adults who have “never experienced base rates above 1%” – adding £1,300 a year to the cost of a typical mortgage. That’s why a more “measured” rate rise makes sense, said Chris Giles in the FT. The BoE will hope “to shock people into believing it’s serious about bringing inflation down, without having to prescribe the painful medicine of markedly higher borrowing costs”. Tricky to pull off.

Women who work from home risk damaging their careers now that staff are returning to the office, a top Bank of England official has warned.

During an event for women in finance hosted by Financial News, Catherine Mann, a member of the bank’s Monetary Policy Committee, said: “Virtual platforms are way better than they were even five years ago. But the extemporaneous, spontaneity — those are hard to replicate in a virtual setting.

“There is the potential for two tracks,” she added. “There’s the people who are on the virtual track and people who are on a physical track. And I do worry that we will see those two tracks develop, and we will pretty much know who’s going to be on which track, unfortunately.”

According to The Guardian, “women aren’t returning to work to the same extent as men, and when they are working, they are more likely to be working from home”.

“Difficulty accessing childcare and disruption to schooling because of the pandemic has led to more women continuing to work remotely,” the paper added.

Mann, who was global chief economist at Citibank from 2018 to 2021, also said the economic downturn caused by Covid-19 has hit women disproportionately.

Financial News said she described the pandemic as “very much a she-cession”. However, some have suggested that the inequality Mann was referring to runs deeper than where workers choose to do their work.

Responding to the comments, lawyer Dr Ann Olivarius tweeted: “With all due respect – it’s being a woman in an already unequal workplace that damages women’s careers.”

Dr Zubaida Haque, a former interim director of the Runnymede Trust, added in a tweet: “If it is the case that women who work from home will ‘damage their careers’” then “perhaps we should change how promotion works?”

British businesses last month reported “that 60% of their staff were fully back at their normal place of work, but proportions vary widely by sector”, reported Reuters.

“In professional services, 34% of staff are in the office, 24% are fully working from home, and 35% are doing a mix,” the news agency added, citing Office for National Statistics data.

In July, experts warned that the permanent switch to more home working following the pandemic could cause rising gender inequality in the workplace.

Joeli Brearley, founder of the charity Pregnant Then Screwed, told The Observer: “Those at home will look like they’re less committed to their job, they won’t have as a good a relationship with their manager, the person that can promote them and give them a pay rise.”

Young people have also been warned that working from home could damage their careers.

In August, Rishi Sunak told LinkedIn News: “I doubt I would have had those strong relationships if I was doing my summer internship or my first bit of my career over Teams and Zoom. That’s why I think for young people in particular, being able to physically be in an office is valuable.”

No central banker likes to be put on the spot about interest rate decisions – let alone be accused of “bottling it”. But that, said Phillip Inman in The Guardian, is the criticism being levelled at Bank of England Governor Andrew Bailey and his Monetary Policy Committee (MPC). Having signalled the need to tackle inflation with the first post-pandemic hike, they failed to make the move – prompting tumult in the bond markets and a 2% fall in the pound.

On the eve of the meeting last Thursday, investors had priced in “a full 0.15 percentage point increase”, taking the benchmark rate to 0.25%, said Moyeen Islam of Barclays Capital Securities in the FT. “The market’s surprise” when it didn’t turn up was evident in the “gyrations” of “policy-sensitive” five-year gilt yields, which experienced “the largest intra-day move” since the EU referendum. Traders were left reflecting that the Bank would be “smart to revisit its communication strategy”.

The Bank “blinked”, said Patrick Hosking in The Times. Despite “reams of evidence that inflation is on the rise and going to get worse” (the MPC raised its forecast to 5% in early 2022), it “couldn’t bring itself to pull the trigger”. Sure, there are reasons to delay: growth is slowing, cost pressures may indeed prove temporary, and there is still a risk of an “adverse” Covid development over the winter. But a small rate rise “would have sent a crucial signal that the Bank is serious” about containing inflation. Its credibility “is now on the line”.

The Bank appears to have “failed a test of political independence on interest rates”, said Ben Wright in The Daily Telegraph. At the very least, it looks cack-handed when compared with the US Fed. There was no market “tantrum” following last week’s announcement that the Fed would start reducing bond purchases. Chairman Jerome Powell made the move “without scaring the horses by being extremely transparent and consistent about his intentions”. What a contrast with Threadneedle Street.

For years, the world’s major central banks have moved in lockstep, said the FT. But “the pace of tightening” now splits opinion. While both the Fed and the BoE are signalling that “rates are likely to rise soon” (and the central banks of Canada and Australia have taken hawkish positions), the European Central Bank under Christine Lagarde is “resisting any shift in policy”.

Central banks face an “extraordinarily difficult task”, said The Economist, as they attempt to “normalise” monetary policy “amid sky-high asset prices, heavy debt levels and above-target inflation”. “Don’t rule out a bigger bond brawl.”

Economics expert John Whittaker of Lancaster University on why an imminent rise in interest rates is needed to keep the UK economy on track

The Bank of England was widely expected to slightly increase its official bank rate on 4 November, but it decided to stick to the all-time low of 0.1%. However, the Bank has made it clear that a rise will soon be needed, and the recent increases in mortgage rates indicate that lenders agree. So why the decision to hold off?

The Bank of England is well aware of the distress that higher rates cause for borrowers and, in particular, for the biggest borrower in the land: the UK government. At the current level of national debt, roughly £2trn, every rise in rates by one percentage point pushes up the interest paid by the government on its bonds by £20bn per year over the long term.

Higher rates also have a dampening effect on the prices of property and financial assets such as shares. Indeed, this is one way in which monetary policy is believed to work: if people feel less wealthy, they spend less and this relieves the pressure on inflation.

On the other hand, what’s bad for borrowers is good for savers. As rates rise, bank deposits will be better rewarded and even the finances of our beleaguered pension funds should begin to look more healthy.

But regardless of who wins and who loses from higher interest rates, inflation is on the rise. The Bank does not want to lose credibility by letting it rise too far before tightening monetary policy.

The inflation dilemma

After rising for the past 12 months, UK inflation is currently 3.1%, and the Bank expects it could even reach an uncomfortable 5% by early next year – much higher than its 2% target. Yet the Bank maintains the view that this higher inflation will turn out to be temporary, arguing that it will fall back as the post-Covid excess demand for goods subsides and supply bottlenecks are worked out. Against that, energy prices are likely to remain higher, driven partly by climate initiatives; and if employers continue to have trouble filling vacancies, higher wages will also tend to push up prices.

The bottom line is that nobody really knows where inflation is heading, so the Bank is wrestling with the usual dilemma: does it raise rates now to forestall future inflation, or does it hold rates down to avoid jeopardising the economic recovery while hoping that inflation will subside by itself? It can’t have it both ways.

This same dilemma is echoed in other countries. In the United States, the position is similarly troubling, with inflation already at 5.4% against a 2% target. Yet the Federal Reserve also continues to insist that the current high inflation is temporary, thereby justifying keeping its official interest rate (the Fed funds rate) near zero.

Yet the Fed is not completely sitting on its hands; it has announced that it will start “tapering” its quantitative easing (QE) programme, in which it is creating US$120bn (£89bn) a month to buy US government bonds and other financial assets to help prop up the economy. From the middle of November, it will scale this back by US$15bn each month. This is at least an acknowledgement by the Fed that its excessively stimulatory monetary policy must eventually come to an end.

Back in the UK, the Bank of England has accumulated £800bn of government debt as a result of its own QE asset purchases, designed to stimulate demand particularly since the outbreak of Covid. At some stage, the Bank will need to begin offloading this debt.

Its choices of when and how to do this present the Bank with arguably an even bigger dilemma than the bank rate, because unwinding QE will drive up yields on bonds – thus directly raising interest costs for the government and all other long-term borrowers.

In fact, yields have already started rising after many years of decline (see chart above). This is a sign that investors think that monetary policy needs to become tighter to curb inflation (by raising official rates and reversing QE) – which also explains why mortgage rates have already been rising.

This all confirms that the long era of ever-cheaper finance is finally over. The future will be tougher thanks to higher interest rates, or higher inflation, or both.

John Whittaker, senior teaching fellow in economics, Lancaster University.

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

1. The Bank of England’s inflation rate stunt

Matthew Lynn for The Spectator

on fiscal forecasting

“In many ways, the current governor of the Bank of England Andrew Bailey is an upgrade on his high-profile predecessor Mark Carney,” writes Matthew Lynn in The Spectator. “And yet, in the most important respect, he is turning out to be very similar.” Bailey “is constantly threatening to raise interest rates, and then backing off at the last moment”. The Bank’s Monetary Policy Committee has this week voted to hold rates, after multiple hints they would be raised. “What is hard to justify is misleading the market,” he says, and this latest episode was “the same kind of stunt that Mark Carney used to pull on the markets”. With his latest decision, “Bailey is turning into the new Carney – and eventually that will start to damage his credibility”.

Read more

2. Boris Johnson’s next problem is his own furious MPs

James Forsyth for The Times

on a fracturing coalition

“This government has learnt how to U-turn quickly in recent months but what we’ve just seen was spectacular, even by its standards,” writes James Forsyth in The Times. Tory MPs are “furious” because they “compromised themselves” to protect Owen Paterson “only to reverse their position only hours later”. Downing Street has “misread the mood of the parliamentary party”, The Spectator’s political editor says, and angry backbenchers are now Boris Johnson’s next big problem. The prime minister effectively heads a “coalition” government in which “veteran MPs sit for traditional Tory seats, while the newer intakes are more likely to represent constituencies that have been Labour until recently”. It will take “careful party management“ to hold his parliamentary party together, he adds. And that is ”not the forte of the Downing Street operation”.

Read more

3. Young people like me have made history this Cop26 ‘youth day’ – now it’s your turn

Scarlett Westbrook for The Independent

on green kids

“Cop26 has failed to successively implement adequate climate measures, decade after decade,” writes Scarlett Westbrook for The Independent, “instead choosing to pass policies that line the pockets of fossil fuel corporations that are tearing our planet and livelihoods apart”. The climate activist argues that “the real force for change at Cop isn’t in the conference hall, but on the streets of the host city”, where, as “world leaders squabble over semantics”, thousands of young people “have gathered together to unite for climate justice”. Today’s strike for “global climate justice” clarifies “the true catalyst for radical and idiosyncratic change that young people are”, she says. “Another world is possible – and we won’t stop our efforts until we attain it.”

Read more

4. Piers Morgan’s departure left Good Morning Britain with an identity crisis Richard Madeley can’t solve

Kuba Shand-Baptiste for The i news site

on TV tribulations

“When Piers Morgan stormed off the Good Morning Britain set and out of the show for good in March, some of us were ecstatic,” writes Kuba Shand-Baptiste on the i news site. But it created a problem for the producers, namely “who was going to give the British public their daily dose of fiery debate”. She is “struggling to see how ITV will fill his shoes”, adding that Morgan’s “professional trolling” has left behind a “gammon-sized hole” that cannot be filled by the “watered-down” Richard Madeley. “What the show needs to think about is what it actually wants to contribute to public debate,” she adds. “It’s easy to live up to an objective of button-pushing if you have an unscrupulous, yet charismatic troublemaker as the focus of your show“, but ”without him, you need a different USP”.

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5. Prince Charles has finally won

Will Lloyd for Unherd

on a royal success

“Prince Charles has been described as a prat, a terrible prat, a dangerous prat, ill-advised, idiotic, the ‘puppet of sinister gurus’, dismal, a ‘sower of division and contention’, and ‘way too grand’,” writes Will Lloyd for Unherd. And that was just one article in The Spectator. Recalling how “everyone from Diana to The Sun and foreigners” would all mock the heir to the throne, Lloyd says that “finally, Charles is respected, admired, and – most shockingly of all – listened to”. His long-standing concern about climate change meant “the world’s leaders saluted him” during the Cop26 conference. The “dissident Prince” is the toast of the town and “accepted at last”, Lloyd adds, because “scientific expertise” now “agrees with him about hedges and bees”.

Read more

The looming lockdown for England will undo the economic progress made over the summer and push Britain into a double-dip recession, according to revised forecasts from leading economists.

Back in April, the first full month of the first lockdown, the UK economy shrank by a record 20.4%. Now, experts are warning that the tighter restrictions announced by Boris Johnson on Saturday will “obliterate the country’s fragile economic recovery”, The Times reports.

Many are predicting that the final-quarter GDP will shrink by as much as 8%. And Gerard Lyons, an economic adviser to Johnson when he was London mayor, told The Guardian that the contraction could be as high as 10%.

Howard Archer, chief economic adviser at forecasting group EY Item Club, agrees that there is “little doubt” a new national lockdown will “cause the economy to contract in the fourth quarter and very possibly by an appreciable amount”. Paul Dales, economist at Capital Economics, added: “The recovery has been quite good and we were making progress but it will go into complete reverse in a short while.”

Bank of England policymakers are expected to agree to inject up to £100bn into the economy when they meet this week. The nine-strong Monetary Policy Committee (MPC) was already poised to announce “gloomier economic forecasts” even before the prime minister announced the drastic tightening of restrictions to tackle rising Covid-19 infection rates, The Guardian reports.

The MPC is said to favour quantitative easing to stimulate the economy - a process in which the Bank creates a form of electronic money that can be used to purchase UK government bonds.

Government borrowing from April to September was nearly four times the £54.5bn borrowed in the whole of the last full financial year. Meanwhile, debt has already hit £2.06trn, equivalent to 103.5% of GDP and a 60-year high.

After cutting interest rates to the current historic low of 0.1% in March, the Bank of England (BoE) has been dropping hints that rates could be set to go negative.

A negative interest rate gives consumers and businesses an “incentive to spend or invest money rather than leave it in their bank accounts where the value would be eroded by inflation”, explains the International Monetary Fund. And the UK economy needs a cash boost as the coronavirus pandemic continues to take a heavy financial toll.

Intimations from “various members of the central bank’s policy committee suggest that they aren’t desperate to go negative”, however - but “nor are they ruling it out”, says MoneyWeek’s John Stepek.

On 12 October, the BoE’s Prudential Regulation Authority sent a letter to banks and financial firms enquiring about their “operational readiness” for a zero or negative bank rate.

With “more and more people are growing concerned about their savings”, financial expert Martin Lewis told viewers of ITV’s Martin Lewis Money Show last week that while “it’s ‘if’ [rates go negative] - very much if”, that likelihood is “more plausible than it was before”, the Daily Mirror reports.

But exactly what could that mean for your finances?

What are negative rates?

The idea of negative interest rates is to “encourage banks to increase lending because the Bank of England will charge them to hold their cash”, says MoneySavingExpert.

But it may also mean “you, the customer, paying your bank or building society to look after your hard-earned savings”, adds This is Money. By contrast, “borrowers (again, in theory) could be paid for having a loan. In other words: out with prudence and in with financial indulgence.”

‘Outlandish and paradoxical’

For most people, the idea of negative interest rates is like something out of Alice Through The Looking Glass - a world in which everything is weirdly inverted”, writes the Daily Mail’s Dominic Lawson. Among central bankers, however, it has become a “very real proposition”.

MoneyWeek’s Stepek agrees that for the rest of us, the notion is “outlandish and paradoxical and very hard to wrap your head around”. He adds: “When you lend money to someone, you expect to be the one who gets paid interest. You’re the one with the money. They’re the party who needs it. Why would you be the one who pays them?”

But “of course, this is the point,” Stepek continues. “If you get paid to borrow money, and you get charged to save money, then we’ll all want to borrow and we won’t want to save. At least, that’s the theory the central banks are following.”

Not everyone is convinced by the banks’ reasoning. In today’s leading article, The Times says that “the Bank of England hopes that a further rate cut would persuade banks to lend. This would be a mistaken policy, with long-term economic costs.”

Impact on mortgages, savings and loans

It may seem “counterintuitive” to charge a business or consumer for depositing money, but “it then allows a bank to lend at a negative rate, which rewards borrowers”, says The Guardian. “A negative-rate mortgage means the interest bill is credited to the borrower’s account rather than debited, reducing the sum borrowed over time.”

MoneySavingExpert.com founder Lewis cautions that people with mortgages and other debts are unlikely to get paid a negative interest rate, however. The best-case scenario would probably be for people on tracker mortages to drop to 0% rates, “so you wouldn't have any cost for borrowing money on your mortgage”.

The impact on savers, meanwhile could be “far more devastating”, because banks might begin charging them to look after their money.

“This is all a great big hypothetical balloon right now,” Lewis continues. “What everyone with savings should do certainly is make sure you’re maximising your money. And if you’re scared of negative interest rates, go and lock in with a fix, providing you won’t need to withdraw money in that time.”

End of free banking?

Virgin Money chief executive David Duffy has also issued a “stark warning” that banks could start charging for basic services if interest rates turn negative.

He told The Mail on Sunday that “there will be no decisions until everyone sees what happens over the next year with Covid, but certainly you have to think about how you are going to provide the service, the technology, the branches and the card. It can’t all be free.”

The paper says that Duffy’s comments are the “clearest signal yet that ordinary customers could be hit if interest rates go negative”, because “currently, the holders of the vast majority of Britain’s 73 million current accounts pay no fees if they are in credit”.

The Mail’s Lawson concludes: “At this rate, there’ll be nowhere left for our savings except under the mattress.”

At least 10,000 jobs have been slashed in the UK in just 48 hours as companies battle to stay afloat during the coronavirus crisis.

High-street retailers and the aviation sector are “bearing the brunt of the losses” as the economic impact of the pandemic continues to be felt, says The Times.

SSP, the parent company of Upper Crust, announced yesterday that 5,000 employees were being made redundant, while John Lewis, Harrods and Philip Green’s Arcadia, which owns Topshop, confirmed a total of around 1,200 job losses.

Harrods managing director Michael Ward pointed to both social distancing measures and the “devastation in international trade” when explaining the company’s decision to cut around 14% of its 4,800-strong workforce.

The news came less than 24 hours after plane-maker Airbus announced 1,700 staff cuts in the UK, and easyJet shared “plans to pull out of Stansted, Southend and Newcastle Airports, possibly putting more than 700 jobs at risk”, reports ITV News.

Aviation firms are in the midst of “the gravest crisis the industry has ever experienced”, said Airbus chief executive Guillaume Faury.

Meanwhile, menswear company TM Lewin collapsed into administration, costing 600 jobs, with furniture store Harveys also going under, resulting in 240 redundancies.

A further 900 cuts were announced at management consulting firm Accenture, while 300 redundancies are being made across Virgin Money, Clydesdale Bank and Yorkshire Bank, according to the BBC.

And many more job losses are expected as other companies seek to reduce costs ahead of the winding down of the government’s furlough scheme.

The Bank of England has predicted unemployment rates may hit 10% by the end of this year, reports the Financial Times.

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The UK economy is on track for a faster recovery from the coronavirus crisis than previous predictions suggested, the Bank of England’s chief economist has said.

“Issuing an upbeat assessment”, Andy Haldane said there were signs of a V-shaped economic recovery - when “growth rapidly snaps back from a steep downturn in activity”, says The Guardian.

Data on payments, traffic flow, energy use and business surveys suggested that “the recovery has come somewhat sooner, and has been materially faster” than was forecast in May, Haldane said during a Bank webinar on Tuesday.

“Policymakers and economists have grown increasingly gloomy in the past few months”, warning of “a slow U-shaped recovery, a ‘W’ caused by a second rise in cases, or even an ‘L’, where the recession is prolonged”, The Times reports.

But Haldane said that while it was “early days”, his “reading of the evidence is so far, so V”.

“Both the UK and the global economies are already well into the recovery phase,” he continued. “The UK’s recovery is more than two months old.”

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However, the BoE expert “emphasised that the economy was still facing an unprecedented collapse and that a steep rise in unemployment posed a threat to a swift rebound”, says the newspaper.

Either consumer spending would ease unemployment or unemployment would cut household spending, Haldane added.

As the BBC notes, both scenarios “create virtuous or vicious cycles”, but Haldane “said that he could not tell which one would prevail” as yet.

The economy is currently “benefiting from robust strength in consumer spending”, boosted by workers working from home or receiving the government’s furlough payments, the broadcaster adds.

But Haldane said that “as the furlough scheme tapers from August”, there would be “a risk this greater number of furloughed workers are not hired back by employers, adding to the unemployment pool”.

The UK government has broken new economic ground by borrowing £3.8bn for three years at a price that means investors will get back less than they paid out.

Or as The Times puts it, “for the first time in history, investors have lent the UK government money for a lengthy period with the promise that they will not be paid back in full”.

The issuing of government bonds, or gilts, with an effective negative interest rate of minus 0.003% on Wednesday came as Bank of England governor Andrew Bailey told MPs that plans to slash the base rate - currently at 0.1% - into negative territory were “under active review”.

So what does it all mean?

A “negative yield” effectively means that investors “have to pay to lend money to fund the government’s response to the Covid-19 pandemic”, says The Guardian.

Gilts are seen as a “safe haven in times of financial stress”, with expectations that “inflation will be close to zero or could turn negative” currently adding to their appeal.

Investopedia explains that during periods of extremely low interest rates, “large institutional investors” are often “willing to pay a little over face value for high-quality bonds”.

These investors accept “a negative return on their investment for the safety and liquidity that high-quality government and corporate bonds offer”, says the financial information site.

The practice has already been deployed in Japan and Germany, with Britain now joining the “topsy-turvy world of negative rates on new government borrowing”, adds The Times.

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What happens next?

Aaron Rock, investment director at Aberdeen Standard Investments, predicts that regardless of whether the BoE’s Monetary Policy Committee chooses to adopt negative policy rates due to low inflation, “there will be continued demand for gilts at low and negative yields”.

BoE boss Bailey last month ruled out cutting policy rates to below zero. But the ongoing crisis has “persuaded the Bank that it needs to consider all tools available to make credit cheaper for embattled businesses and households”, according to The Guardian.

“The move would be unprecedented in the Bank’s 325-year history and would leave only the US Federal Reserve among major central banks to rule out negative rates,” the newspaper adds.

The UK’s budget deficit is set to increase to a level never before seen in peacetime, as government borrowing to cover the coronavirus cost burden skyrockets.

In a statement to financial markets, the Treasury said it would seek to raise £180bn over the next three months to allow it to meet its spending needs as tax revenues plunge. This is on top of £45bn already planned for April.

The Financial Times reports that “the government is likely to find willing buyers for the avalanche of gilts it will place on the market in coming months because the Bank of England has pledged to snap up £200bn in the secondary market under its latest and largest quantitative easing programme”.

“The government’s gilt sales to City investors and overseas asset managers are typically higher than the budget deficit – the annual shortfall between public spending and income from tax receipts – as it includes raising money to refinance existing government bonds,” says The Guardian. “However, the vast increase in gilt sales suggests that borrowing is expected to balloon, as the state pays workers’ wages and as more people claim unemployment benefits”.

“One reason is the huge cost of programmes such as furloughing, now expected to cost well north of £50bn,” says BBC economics correspondent Andy Verity. “The other reason is that the government's revenues - the tax it collects through income tax, VAT and national insurance - are collapsing. If you shut down much of the economy, you also turn off the tap on much of the government's tax income.”

The Office for Budget Responsibility (OBR) has warned that the budget deficit could surge to £273bn this financial year - 14% of GDP, which “would be the largest single year deficit since the Second World War”, the Daily Express says.

The picture for the full financial year looks even bleaker.

The OBR estimates that the government might need to borrow up to £382bn for the year, about seven times what was expected pre-Covid. “That depends, though, on the shutdown being lifted sooner rather than later,” says Verity.

The Resolution Foundation thinktank, meanwhile, calculates that a six-month lockdown would require the government to raise around £500bn in financing this financial year.

“It signals a massive challenge ahead for the government to claw back cash at a time when it is also, currently, determined to press ahead with its election agenda of ‘levelling up’ UK regions,” says Sky News.

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The chancellor is facing mounting pressure to fully underwrite loans to hundreds of thousands of small businesses ahead of payday this week.

Under the government’s flagship £330bn bailout scheme unveiled last month, the Treasury has promised to cover 80% of wages up to £2,500 a month to businesses who furlough staff rather than making them redundant.

However, one month into the lockdown, and with Friday’s payday looming, “businesses are fast running out of cash” but “money is only trickling out of [Chancellor Rishi] Sunak’s £330bn bailout fund”, says The Times.

As of the middle of last week, only £1.1 billion had been lent to about 6,000 of Britain’s 5.8 million small companies. Yet today up to 2.3 million businesses are eligible to apply for government furlough cash to pay wages, “potentially flooding HMRC’s new website when it opens”, says The Times.

Comments by Bank of England Governor Andrew Bailey that an extension of government guarantees to lenders from 80% to 100% could speed up the delivery of financial assistance to cash-strapped firms and make the process less complicated has “heaped additional pressure on the Chancellor to follow the example of other countries” says the BBC.

Once again Germany has been held up as the example to follow. Fully backed by the state, its scheme has already lent out €7bn compared with just £1.1bn in the UK.

US lenders have approved more than 300 times as much lending as in the UK while even Swiss banks have approved 98,000 loans, compared to just over 6,000 in the UK.

Arguing “numerous restrictions to both lenders and borrowers show the state-backed loan scheme is not currently fit for purpose”, The Telegraph says “banks still feel the need to put a big effort into the so-called ‘forward-looking viability assessment’, which is supposed to work out the chance of a company actually having a business on the other side of the crisis”.

“Many have said they are worried the British Business Bank, the administrator of the loans, will use inadequate assessments as an excuse to walk away from the 80% of the loan that the government is guaranteeing,” the paper says.

The BBC reports that “currently banks do not feel they can dispense with normal credit checks just because they may ‘only’ lose 20% of the sum advanced”.

Shadow business secretary Ed Miliband is one of a growing number arguing that the state should fully underwrite the loans rather than just 80% of the value as it currently does.

“On the other side of the crisis, you will not wish you had done less but that you had done more,” he said.

However, the BBC adds that “expanding the guarantee to 100% would mean the taxpayer would be taking all the risk that the loans were not repaid”, an outcome Miliband has admitted creates a “moral hazard”.

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The British government has announced a financial stimulus package unprecedented in peace time as it bids to offset the economic impact of the coronavirus.

On top of its £350 billion bailout package, equating to roughly 15% of GDP, the Treasury has also promised grants to cover 80% of the salary of retained workers up to a total of £2,500 a month, a freeze on business VAT, cash handouts for small businesses, extra welfare payments and yesterday support for five million self-employed workers.

But while “almost everybody agrees that the government can't afford not to make huge interventions to keep businesses, households, workers and the economy afloat” writes BBC economic editor Faisal Ahmed, “the costs are now racking up”.

So where does this money come from?

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“It’s important to distinguish between government spending and state loan guarantees” says The Independent’s economics editor, Ben Chu.

The Chancellor’s £330bn of loan guarantees are a contingent liability for the UK state, meaning that “if the loans made by banks to suffering private companies are not repaid the state will have to compensate the commercial lenders”.

“In ordinary times, a recession means less tax and more spending, sending deficits higher as a result of the so-called ‘fiscal stabilisers’”, says Ahmed. “But this is no ordinary downturn” and so “massive borrowing is needed to spend tens - and perhaps hundreds - of billions more at a time when the tax base is eroding”.

Last week, the Bank of England cut its target rate to a record low 0.1% and boosted its bond-buying program by $230 billion, “having previously rolled out a cheap credit program, and gave banks more scope to lend”, reports Quartz.

Chancellor Rishi Sunak said the figures are “on a scale unimaginable only a few weeks ago”, but the impact of not propping up the economy would be far more costly to the UK in the long term.

“Eonomists identify the gravest threat in the current environment not as falling economic activity – that is a necessary by-product of dealing with the health emergency – but as the long-term damage to our productive capacity,” Chu says.

“If the Government undercooks its stimulus or bailout packages today, during the crisis, more businesses than otherwise will go bust and unemployment will rise further and this will scar the economy long into the future”.

The greater questions is not, therefore, whether we can afford the vast sums of money being pumped into the economy, but who will pay for it.

“We may be in the midst of an unprecendented global crisis but the Right have lost no time in trying to capitalise on the crisis to create the low-tax, small state nation they want to see,” reports Left Foot Forward.

The left-wing news site says the Taxpayers’ Alliance group, a right-leaning think tank, has already written to members arguing said that the debts the government is running up in the crisis should be paid off by “spending restraint” rather than taxes.

“Restraint here is a euphemism for cuts” the left-leaning news site says and “when the immediate danger of coronavirus passes, this is likely to be the debate which defines much of the 2020s”.

In a statement, the Taxpayers’ Alliance said: “For once, calls for higher spending, borrowing and debt are justified.” Once the crisis has passed, it added, “debt levels will need to be brought back down rapidly through growth-enhancing measures and spending restraint”.

The Bank of England has cut interest rates, warning the coronavirus pandemic will result in a “sharp and large” shock.

In a bid to support the UK economy in the face of the outbreak, the Bank made its second interest rates cut in a little over a week, bringing them down to 0.1% from 0.25%.

The coronavirus pandemic has “truly moved UK economic policy into uncharted territory with that emergency rate cut,” The Guardian reports.

Meanwhile, Faisal Islam, economics editor of the BBC, says monetary policy “remains a blunt tool to deal with a pandemic and its economic fallout”, but adds that the move creates “some space” for “much more action on tax and spend... to deal with the enormous economic hit from the virus”.

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The Bank said the measures announced earlier this week by Chancellor Rishi Sunak were not going to be enough to protect the economy, adding that “a further package of measures was warranted”.

Jeremy Thomson-Cook, chief economist at payments company Equals Group, says that with the interest rate cut, the Bank of England is effectively saying “your move” to the Treasury.

“The base rate is now at the lowest level we think the Bank of England is prepared to go to and with that will come a not so unsubtle hand-off of the stimulus baton to the Treasury,” he says.

Unless money is “forced into the hands of small businesses soon then it will be for nothing; they are the ones laying off staff due to a liquidity shock,” Thomson-Cook adds.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “Britain is now a whisker away from the negative interest rate club.”

The emergency cut is bad news for savers, as High Street banks use the Bank of England base rate as a reference point for savings accounts. The rate cut could, however, benefit homeowners, although it will not affect fixed-rate mortgages that account for roughly half of home borrowing in the UK.

Martin Lewis of MoneySavingExpert.com said after last week’s cuts that it is a good time to remortgage.

He told This Morning: “If you're looking to remortgage, I would say right now this is a very good time. I'd wait a week or two, because those mortgage rates are going to come down.”

The Bank also unveiled another £200bn in bond buying under the quantitative easing programme, as well as extending the term funding scheme. The latter is hoped to encourage lenders to pass on the benefits of interest rate cuts to companies and households.

Andrew Bailey, the new governer of the Bank of England, took over from his predecessor Mark Carney on Monday.