Markets bet on looming recession as businesses feel the squeeze 

Markets are increasingly betting on a recession after the Bank of England delivered a bumper interest rate hike. 

The increase threatens to squeeze millions of borrowers as traders were betting in the wake of the announcement that it would pave the way for further hikes. 

Gary Smith, partner at wealth manager Evelyn Partners, said the ‘big bazooka’ increase could mean more mayhem in the mortgage market – already under severe strain. 

And business groups also expressed fears about what impact the higher rates would have on investment and performance for small and medium sized companies. 

Neil Wilson, chief markets analyst at Markets.com, said the ‘recession hike’ was an admission that the Bank could not tame inflation without provoking an economic downturn. 

Those fears meant that a brief spike in the pound after the interest rate announcement proved short lived and it ended three tenths of a cent lower versus the dollar at just above $1.27. 

It adds to the underlying investor anxiety over the UK, still lingering after last autumn’s mini-Budget and set to grow again as the uncertainty of a general election approaches. 

Joe Tuckey, head of FX analysis at Argentex said: ‘The lag effect of yet more tightening may mean that UK economic data is bound to deteriorate in coming months.’ 

Meanwhile, yields on ten-year bonds fell further below those of two-year bonds, meaning that investors are demanding a bigger return for lending to the government over the short term. 

An ‘inverted yield curve’ such as this is often interpreted as a warning of recession. 

The curve is the most inverted since 2000 and has increased over the course of June at the sharpest pace since June 1994. 

Rising rates are adding to headaches for businesses, said David Bharier of the British Chambers of Commerce. 

‘While inflation is still the top concern for businesses, interest rate rises are causing worry for a rapidly growing number of firms with soaring borrowing costs,’ he said. 

Martin McTague of the Federation of Small Businesses said: ‘An increase in interest rates comes as no surprise, but the size of the increase will hurt, and rate rises are not a magic wand in reducing inflation.’