BoE’s rate hikes threaten growth as economy shrinks 0.1% in May

BoE's rate hikes threaten growth as economy shrinks 0.1% in May

The UK economy shrunk by a lower-than-expected 0.1% in May, partially due to an additional bank holiday for the King’s coronation, recent ONS data has revealed.

However, experts say the economy had already shown signs of struggle before the full impact of recent interest rate hikes came into play, and it is now anticipated that the Bank of England may make further rises to 6.25% by year-end.

Scottish Friendly’s savings specialist, Kevin Brown, expressed concerns over the long-term prospects of the economy and impact on households.

Kevin Brown, savings specialist at Scottish Friendly, commented: “Inflation remains high with wages falling to keep pace in real terms and households now facing the shock of significantly higher mortgage payments. It’s a major issue for both mortgage holders and renters who are ultimately reliant on landlords with mortgages.

“Official figures reveal nearly 1 million households will see their mortgage bills rise by more than £500 by the end of 2026. It’s equal to suffering a massive pay cut and means many families will see their disposable income plummet.

Mr Brown continued: “Consumer confidence and spending is going to be severely dented which doesn’t bode well for an already stagnant UK economy. The Bank of England’s immediate priority is to bring inflation under control which is why it’s hiked rates so dramatically, but the knock-on effects could have longer-term repercussions for households and the UK’s economic output.”

The Federation of Small Businesses (FSB) in Scotland has called on decision makers to offer more support to small businesses. FSB’s Scotland policy chair, Andrew McRae, encouraged actions such as tackling late payment, robust energy bill support, and legislation that considers small businesses’ needs.

In contrast, Martin Beck, chief economic advisor to the EY ITEM Club, remains optimistic about a rebound in Q3, pointing to potential improvements in private sector activity and a return to normality in supply chains. However, he acknowledged that the ongoing pressure of high inflation and impending peak impact of monetary policy tightening might slow the economy’s growth rate.

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