Good morning. I very much don’t want to sound like a doomster or in any way talk Britain down, so let’s just say this: after careful consideration, First Edition is not advising to you make the minutes of the Bank of England’s latest monetary policy committee meeting one of your August beach reads.
Many expected that the Bank would increase interest rates by half a percentage point yesterday to 1.75%, its sixth increase in a row and the steepest in 27 years – and so it did. But the underlying forecasts made for even uglier reading than analysts had predicted.
The Bank now thinks that the UK will enter a recession in October that will last until the end of 2023, the longest since the 2008 financial crisis. It expects inflation to peak above 13% later this year, the highest rate since 1980, and to stay high for much of next year. And it says unemployment is likely to climb to 6.3% by 2025, from 3.7% today. Remember that £30bn “fiscal headroom” Rishi Sunak and Liz Truss have been basing their Tory leadership promises on? That’s gone, and then some.
The good news is, the prime minister and the chancellor are on their summer holidays. For an explanation of the bad news, and what it means for you, read on after the headlines.
Five big stories
Environment | The intensification of extreme weather events is linked directly to the climate crisis, according to a new Guardian analysis. Some 71% of 500 events examined were made more likely or more severe, with at least a dozen all but impossible without human-caused global heating.
UK news | The Metropolitan police are investigating four sexual offence allegations against the DJ Tim Westwood, one of which dates back 40 years. Westwood has denied all allegations against him.
Taiwan | The US has criticised China as a second day of military exercises was due to begin just off Taiwan’s coast in the wake of Nancy Pelosi’s visit. You can follow the latest updates on our liveblog here.
Conservative leadership | Liz Truss has claimed her tax cut plans could avert the looming recession in a televised leadership interview where Rishi Sunak said her plans would simply “put fuel on the fire of this inflation spiral”.
US news | The jury in Alex Jones’s defamation trial ordered the far-right conspiracy theorist to pay $4.1m in compensatory damages over his repeated claims that the deadly Sandy Hook school shooting was a hoax. The jury may award further punitive damages on Friday.
In depth: The impact of 1.75%
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What does it mean that the Bank has raised interest rates to 1.75%?
The Bank of England’s base rate is the interest it pays to commercial banks whose money it holds. It’s the underlying interest rate that in turn influences the rates those banks charge their customers for borrowing, or pay them for saving. It’s the biggest single tool the Bank has for fulfilling its role of keeping inflation close to an ideal of 2%.
Inflation is much higher than that at the moment – and it is predicted to get even higher, and stay there. By putting the base rate up, the bank hopes that it will reduce spending, and counteract some of that inflation.
The Bank usually hates to put rates up if it thinks a recession is coming, because doing so makes one more likely. But this time, it appears to think the problem with inflation requires it to do so anyway – and even that a recession may be part of the solution to bring inflation under control.
If you take a very long view, a rate of 1.75% is still low. But when the increase is the sixth in succession with more all but certain to follow, and with many people having chosen to borrow more than they might have in higher-interest eras, to say nothing of a generational energy crisis in the offing, the historic comparison may not capture the impact of the change.
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How will the news affect my finances?
Rupert Jones and Hilary Osborne have an excellent detailed guide. Mortgage rates are going to go up, so for those not on fixed rate deals can expect an increase in their monthly repayments – and those seeking a new fixed rate deal will be spending significantly more. (The lowest fixed rates on offer have already jumped from 1.3-1.5% in January to 3.4-3.5% today.)
That’s also bad news – when is there ever anything else – for first time buyers already contending with house prices that are continuing to climb. But, as Larry Elliott set out earlier this week, prices may finally start to come down as mortgages get more expensive and unemployment rises.
Most credit card rates will not automatically rise, but they will reflect the new bank rate in the end, and more and more people are using credit or taking out loans to pay their bills. Of course, those who have no choice but to do so are already among the worst-off.
Those minded to save will get a better rate than previously. But with inflation so high, the value of their savings will still be decreasing over time. As this piece points out, people with their money in easy-access accounts last saw returns above inflation in 2008. It is good news for those looking to build a pension pot or cash in their fund for an annuity.
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Why has the Bank done it?
According to governor Andrew Bailey, the alternative is “even worse”. Bailey acknowledged in a press conference yesterday that the vast majority of inflationary pressure in the economy so far is caused by factors outside the bank’s control – overwhelmingly “Russia’s restriction of gas supplies to Europe and the risk of future cuts”. But he said that “domestic inflationary pressures have also remained strong”.
The argument the Bank makes is that the impact of the energy crisis is likely to be temporary, and that it has to act now with a view to bringing inflation down as much as possible when it abates. In essence, it accepts that a recession is inevitable and its increase in interest rates is likely to contribute – but it sees an increase in unemployment and pain for borrowers as the unpalatable but unavoidable price of getting back on an even keel. Bailey argues that without doing so, those worst affected will be “those who are least well-off in society”.
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What do its critics say?
Plenty. Liz Truss and her allies have been arguing that the Bank has been “asleep at the wheel” by not pushing interest rates up further sooner – and have threatened to end the independence which the bank has held for 25 years.
Others argue that, on the contrary, putting rates up is a mistake because it will have no impact on the real driver of this crisis – energy prices. From that perspective, the Bank appears simply to be pushing rates up for the want of any other useful levers. Aditya Chakrabortty points out that in May, Bailey said he was “helpless” to stop inflation, and argues that this rise is likely to “put firms out of business and sink households into a debt crisis”.
The Guardian’s editorial from Wednesday is worth reading in full: it argues that with wages stagnant, “inflation is really a form of rationing – rationing by price, so that the wealthiest can afford to keep their houses warm this winter and their cars filled with petrol, while those with less money have to make some stark choices.” A rate rise, it goes on, “adds to the economic pain by making mortgages and credit card bills another worry for families already stressed about paying for energy and food”.
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What happens next?
The Bank has not committed to further rate rises, and Bailey says policy is “not on a pre-set path”. But in the monetary policy report, the Bank said it remained willing to act “forcefully”, the same language that preceded this increase. Analysts think there is a strong chance that in September the rate could rise further.
In the meantime, there will be pressure on chancellor Nadhim Zahawi to alleviate the impact of this rise on the worst off – but with a new prime minister not in place until September, he may feel it is impossible to take significant action. Liz Truss has promised an emergency budget; she acknowledged in a Sky News discussion last night that what the Bank says is “extremely worrying” but that a recession is “not inevitable” and that lower taxes are the solution. Sunak also suggested that he could “of course” avert a recession but that tax cuts would “put fuel on the fire.”
The cold reality is that whatever happens will have no impact on the sharp increases to energy bills that are baked in over the next six months. And the Bank believes the most likely scenario is that household incomes will decline by 5% by 2024 – the biggest fall since records began more than half a century ago.
What else we’ve been reading
In this week’s edition of the heat or eat diaries, James explains why rent strikes and energy bill boycotts could put him in an even more precarious position if he tried to take part. “Winter is coming, and a 40% hike in energy costs will accompany the cold,” James writes, “I don’t know how long we can continue to tolerate this.” Nimo
Polly Toynbee writes that even as the economic outlook worsens, the two Tory leadership candidates appear to “inhabit another universe”. In seeking to win among the party’s right-wing base, she adds, “each step takes them further from voters they will need.” Archie
The constant urge to be productive often ruins the fun of having time off work. Emma Brockes goes through how she let go of the impulse to fill her days with tasks and errands. Nimo
The astonishing story of Alex Jones, the US far-right provocateur who has been on trial for defamation over his false claims that the Sandy Hook shooting was a hoax, reached a new nadir when his lawyer accidentally sent the contents of his phone to prosecutors. In the Atlantic, Charlie Warzel has written a fine observational essay about the trial. Archie
After decades of white flight, schools in Dallas, Texas looked increasingly homogenous, with those in areas that are poorer with more people of colour having fewer resources. Kate Rix takes a look at the school trying to reverse this trend and make education fairer for all. Nimo
Sport
Football | Ahead of the opening game of the Premier League season between Arsenal and Crystal Palace on Friday, Arsenal manager Mikel Arteta said his side were “ready to go to a different level” thanks to new signings Gabriel Jesus and Oleksandr Zinchenko.
Commonwealth Games | Jack Laugher won his third successive Commonwealth gold with victory in the 1m springboard diving. Andrea Spendolini-Sirieix, daughter of First Dates’ star Fred Sirieix, won gold in the women’s 10m platform diving final.
Basketball | WNBA star Brittney Griner has been sentenced in a Russian court to nine years in prison for possessing cannabis oil. US officials say Russia wants to swap Griner in a prisoner exchange for convicted arms dealer Viktor Bout.
Something for the weekend
Our critics’ roundup of the best things to watch, read and listen to right now
TV
Irma Vep (Sky Atlantic/Now)
Oscar-winner Alicia Vikander (above) stars as a velvet-catsuited villainess in this series about a film about a series of films – but while it may be headspinningly meta, it is also fun, witty and a total visual treat. Emine Saner
Music
Maggie Rogers – Surrender
Songs such as That’s Where I Am are clean and punchy like Sheryl and Shania, though Rogers dips this in alt-rock on the excellent Honey and the Placebo-like promise of Want Want. Throughout, she gives an exceptional vocal performance, urgent and belting, especially on Shatter, a turbo-charged, Haim-style ripper. Kate Hutchinson
Film
What Josiah Saw (Shudder)
Director Vincent Grashaw stitches together fragmented stories of grubby low-lives and festering family secrets to create an unsettling tapestry of sordid horror. Phil Hoad
Podcast
Dateline: Missing in America
There’s always something very intriguing about people who vanish, and Josh Mankiewicz and Andrea Canning peel off the layers of such stories in this podcast. Each episode focuses on one missing person, starting with Heidi Planck, a California mum whose ex-husband raised the alarm when she didn’t pick her son up from school. Hannah Verdier
The front pages
A wrap of today’s papers is here, but in brief: The Financial Times says: “BoE warns of long recession as interest rates rise by half-point” along with an alarming graphic. “Britain slides into crisis”, says the Times, along with a graphic titled “black Thursday”. The Guardian says “Bank raises rates and warns of 13% inflation”, alongside the grim climate analysis. The i and Metro both go for “the big squeeze”, while the Mirror accuses both Boris Johnson and Nadhim Zahawi of being “missing in action” (ie on holiday) at a crucial moment for the nation. The Telegraph focuses on the income shock for families – its headline is “Recession to cause record drop in income”. The Mail calls governor Andrew Bailey a “Banker who’s running out of credit”, saying he should have raised interest rates last year. The Express says “Recession on way … time to batten down the hatches” but notes pensions will rise.
Today in Focus
The deadly consequences of Britain’s lockdown drinking
What will the cost be of our lockdown drinking habits? A University of Sheffield study has estimated England could have up to 25,000 excess deaths over the next 20 years
Cartoon of the day | Martin Rowson
The Upside
A bit of good news to remind you that the world’s not all bad
In Leeuwarden, volunteers have been moving 1,000 trees through the Dutch city, so that residents can experience an alternative, greener future. Landscape architect Bruno Doedens and Joop Mulder came up with the idea of the “walking forest” after growing increasingly frustrated at the adolescent attitude that human beings have towards nature. “We need to grow up and stop making a mess of everything,” said Doedens, “we need to take care of our surroundings.”
The project has received huge amount of local support and later this month the trees will be permanently planted around the city, particularly in low-income neighbourhoods, where there isn’t much green space.
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s crosswords to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until Monday.
