UK Recession Now Likely as Interest Rates Rise Faster

Fitch Ratings has lowered its UK GDP forecast for 2023 since the publication of the latest Global Economic Outlook (GEO) in September following extreme volatility in UK financial markets and the prospect of sharply higher interest rates. We now expect UK GDP to decline by 1% in 2023 compared with -0.2% in the September GEO.

UK government bonds and the pound sold off sharply following the mini-budget on 23 September as sizeable unexpected and unfunded tax cuts – coming on the back of a large-scale energy price subsidy – signalled sharp increases in government borrowing.

The jump in real interest rates sparked disfunction at the long end of the government bond market as defined-benefit pension funds faced margin calls on out-of-the money interest rate swap positions related to liability-driven investment strategies. The Bank of England (BoE) was forced to announce a temporary intervention to buy up to GBP65 billion of long-dated gilts to prevent a ‘doom loop’ of pension fund forced selling to raise collateral. Read More