In the News Teaching Activity – BoE warns against early interest rate cut (Nov 2023)

The Bank of England is expecting a stagnant economy over the next year but is keeping its base rate at 5.25% to squeeze the inflation rate back down towards its target of 2%.

The Bank of England predicts no growth in the UK economy until 2025, but it is maintaining higher interest rates to combat inflation. The economy is on a tightrope – it could easily slip into recession. Despite Rishi Sunak's goal to boost growth, recent downgrades of growth forecasts challenge this hope. Inflation is expected to decrease but may persist above target for some time still. Mortgage costs have risen while savings rates are higher due to previous rate hikes. Students who have learned about the circular flow of income model could use it to work out how keeping interest rates high is likely to affect national income growth.

Bank holds interest rates and warns it's too early to cut - BBC News

1 What is the Bank base rate?

2 How would you expect consumers to respond to the Bank’s decision to keep interest rates high?

3 Thinking about the circular flow of income model, what are the three injections into and the three withdrawals from the circular flow? Using this model as a guide, what impact would you expect maintaining high interest rate to have on GDP growth?