Bank suggests 350,000 rise in unemployment is the price to pay for bringing down inflation

The Bank of England continued the largest cycle of rate rises in more than 30 years with an unprecedented fourteenth increase in a row, but the main news in today’s announcement was gloomy forecasts that point to a weaker GDP outlook and a sharp rise in unemployment as the price we all must pay for bringing inflation back to target, the Resolution Foundation said today (Thursday) in response to the Bank’s latest Monetary Policy Report (MPR).

The Monetary Policy Committee (MPC) raised Bank Rate by 0.25 percentage points to 5.25 per cent, the highest rate in more than 15 years and unveiled forecasts that suggest more economic pain will be needed to bring inflation back to 2 per cent.

The Bank’s forecasts suggest the UK’s tight labour market is the key reason why interest rates need to rise by more than expected just a few months ago. The forecast for private-sector regular pay growth has been upgraded and implies that the real-wage squeeze will end in Q3 this year, three-months earlier than expected. But this wage pressure comes with larger rate rises, contributing to a predicted rise in unemployment of around 350,000.

More worryingly for the Government, the Bank’s forecasts suggest that the backdrop to the election next year will be rising unemployment, average increases in mortgages of around £3,000 as households move off fixed-rate deals, and weak GDP – with growth for 2024 the weakest for an election year since 1992 (at just 0.4 per cent).

James Smith, Research Director at the Resolution Foundation, said:

“The Bank’s decision to raise interest rates for a fourteenth meeting in a row – continuing the largest tightening cycle in more than 30 years – was expected. But this will provide little comfort for mortgagors facing an increase of around £3,000 in repayments next year.

“While there is good news from the Bank of England that the real-pay squeeze will end sooner than expected, the price for taming inflationary pressures from Britain’s tight labour market is an increase in unemployment of around 350,000.

“Today’s gloomy outlook from the Bank of England is particularly bad news for Rishi Sunak with the Bank’s forecasts suggesting that the likely backdrop to an election next year will be falling GDP, higher unemployment and big increases in mortgage repayments.”