Bloomberg Economics has issued a warning that the Bank of England’s measures to control inflation could result in a recession for the UK. Economists Dan Hanson and Ana Andrade predict a mild yet prolonged downturn as a result of tackling an inflation rate nearing double digits, despite previous interest rate hikes. They forecast a year-long recession starting in the fourth quarter, with a projected loss of just over 1% of economic output. However, if money markets continue to price in a higher interest rate, the downturn could be worse. The economists also caution that borrowing costs exceeding 5% could lead to a financial stability shock, potentially impacting Prime Minister Rishi Sunak’s political environment. The Bank of England’s actions may face criticism from Conservative lawmakers, and the central bank may have to reinstate its recession warning in August. Hanson and Andrade have revised their growth estimates for the UK economy and predict inflation to end the year above 5%. They warn that aggressive tightening by the Bank of England could result in a deeper recession if past tightening effects last longer than expected or create financial instability. They expect the central bank to start cutting rates next year but proceed cautiously due to inflation still being above target.
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