Taming Inflation Could Cost the U.K. 600,000 Jobs

May 6, 2022

The Bank of England (BOE) raised interest rates to 1% this week, the highest since 2009, in an effort to tamp down rampant inflation. Traders expect that the central bank will have to raise rates significantly higher to truly combat inflation. Unfortunately, the BOE projects that raising rates to the level that traders anticipate would come at a steep economic cost.

If current market assumptions that interest rates will climb to 2.5% by the middle of next year come to pass, the BOE projects that the British economy will contract in 2023 and stagnate in 2024. This would cost the economy nearly 600,000 jobs and cause the unemployment rate to spike, jumping to 5.5% from its current 3.8%.

If rates are held at their current level, the BOE estimates that 440,000 fewer jobs will be lost and growth would improve to roughly 1% in both 2023 and 2024.

It remains to be seen how aggressively the BOE will be able to raise rates without depressing the economy, but inflation is expected to continue its climb, hitting a 40-year high of 10.2% in October, so they will likely have to raise rates beyond their current level.

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