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Interest rates: Do interest rates go up in a recession?


The UK is officially in a economic recession for the first time since the 2008 financial crash. The UK economy suffered its biggest drop on record between April and June as the coronavirus lockdown measures all but halted many sectors of the economy.

The economy shrank 20.4 percent in comparison with the first three months of the year.

It is the “largest recession on record”, the Office for National Statistics (ONS) said, and the first time a recession has been declared in the UK since the financial crash of 2008.

A recession is defined as two consecutive quarters of decline in gross domestic product (GDP) – the amount of goods and services a country produces.

But monthly figures showed the economy bounced back by 8.7 percent in June, following upwardly revised growth of 2.4 percent in May, as lockdown restrictions eased.

The ONS said the economy is still a considerable way off from recovering the record falls seen in March and April after tumbling into the biggest recession on record.

Further figures show the number of people in employment fell by the largest amount in more than a decade between April and June.

A drop in GDP was expected during lockdown – while shops and businesses were closed, the total value generated by goods and services decreased.

This has the knock-on effect of the people employed by those businesses earning less money – either a fraction of their salary or nothing at all if they were made redundant.

However, a central bank, such as the Bank of England, can use monetary policy to counteract the normal forces of supply and demand to reduce interest rates – this is why we actually see falling interest rates during recessions.

Interest rates in the UK currently sit at an incredibly low 0.1 percent, and will remain the same until the rest of the year.

The International Monetary Fund (IMF) predicts huge falls in GDP for 2020 as a whole – an extraordinary fall of 8.0% for the US and 10.2% for the UK.

It estimates the entire world economy will shrink by 4.9% this year, making it the worst recession since the 1930s’ Great Depression.





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