UK: Bank of England warns of economic slowdown amid energy price crisis due to Ukraine war

The Bank of England has warned that Britain's economy is likely to suffer a growth slowdown due to the biggest single shock to energy prices since the 1970s owing to the ongoing war between Russia and Ukraine. According to the bank's governor, Andrew Bailey, demand from consumers and businesses is weakening as they grapple with the cost of living crunch, including skyrocketing prices for gas, electricity, and other products and services. "The shock from energy prices this year will be larger than any single year in the 1970s. The caveat is that the 1970s had a string of years, and we sincerely hope that will not be the case now. But as a single year, this is a huge shock," he added at an event held by the Bruegel think tank in Brussels, The Guardian reported. 

As per the Office for National Statistics, 51% of Britons are spending less on non-essential items, 34% are conserving gas and electricity, and 31% are spending less on food and other necessities. Following the launch of Russia's military attack in Ukraine, the price of oil and gas has risen dramatically. After a steep increase in household gas and energy costs in the United Kingdom, Threadneedle Street predicted inflation could reach 8% this spring. It further warned that, with inflation already high before Russia's invasion of Ukraine, the war's impact on global energy costs could push UK inflation near 10% later this year. 

UK central bank raises interest rates by 0.25-point

The UK central bank has responded by raising interest rates, which now stand at 0.75% following a 0.25-point increase at its March policy meeting. It prioritised concerns about high inflation over the impact on economic growth to prevent the current price rise from becoming more persistent in the future. The Bank's goal is to keep inflation at or below 2%. "We expect it to cause growth and demand to slow. We are beginning to see evidence of that in both consumer and business surveys," Bailey claimed, as per The Guardian. 

Lower growth rates could lead to a reduction in inflation: Bank of England

The Bank of England's governor also stated that lower growth rates could lead to a reduction in inflation without the necessity for substantial interest rate hikes from the central bank. We expect domestically generated inflation to be weighed down by this demand pressure. As a result, we anticipate inflation returning to target in about two years. It is worth mentioning here that the government's economic forecaster - the Office for Budget Responsibility - reduced its 2022 growth estimates from 6% to 3.8% last month, warning that the worst rate of inflation in four decades would impair consumer demand.

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