The Bank of England has warned that the UK economy is likely to see no growth following the Chancellor’s recent Budget, as businesses react to record tax increases by raising prices and reducing staffing levels. Policymakers now expect the economy to flatline in the final quarter of 2024, a downgrade from their earlier forecast of 0.3% growth. This follows concerning figures that showed a contraction in output in October, raising fears of a looming recession.

While the Bank’s Monetary Policy Committee (MPC) voted to keep interest rates at 4.75% on Thursday, Governor Andrew Bailey acknowledged the uncertain outlook. He stressed that the Bank cannot commit to future rate cuts at this stage due to ongoing uncertainties stemming from the Budget’s measures.

Analysts have cautioned that both households and businesses may face continued cost pressures into 2025, with inflation remaining persistent despite subdued economic growth. A recent Bank of England survey found that an increasing number of households expect economic stagnation to become the norm. “There was a common view that the UK was moving from a cost-of-living crisis to a prolonged period of higher costs and lower living standards,” the report stated.

Businesses have reacted to the Chancellor’s decision to raise employers’ National Insurance contributions by £25bn, a move that is expected to keep inflation elevated for longer. Many companies have opted to increase prices instead of reducing wages, while also scaling back on recruitment and working hours to cope with rising costs.

Prime Minister Rishi Sunak acknowledged that improving living standards “will take some time” and “won’t be fixed by Christmas.” Chancellor Jeremy Hunt defended the Government’s approach, claiming that low-income families are already feeling the benefits of recent measures. However, the Bank’s survey painted a more cautious picture, with many households feeling that official commentary on economic recovery did not align with their lived experience of high day-to-day costs.

The Bank of England noted that the National Insurance hike is “weighing heavily on sentiment” among businesses, dampening their optimism about a swift economic recovery. Consumer concerns have also extended to the housing market, where the Bank observed that many buyers are now reluctant to make significant financial commitments.

Economists at Citi warned that price increases planned for next year could keep inflation stubbornly high, while analysts at HSBC suggested that the UK could be drifting towards stagflation, justifying higher interest rates even if growth slows and unemployment rises.

Minutes from the MPC’s latest meeting revealed differing views among policymakers on the long-term effects of the Budget. While three members supported an immediate rate cut, the majority, including Governor Bailey, remained cautious, noting that inflationary pressures are still too uncertain to allow a quick policy shift. Market expectations are now leaning towards a possible rate cut in February, although Mr. Bailey emphasized that any reduction in borrowing costs would be gradual to ensure the 2% inflation target is met.

Businesses have expressed surprise at the scale of the National Insurance rise, particularly the reduction in the threshold at which employers must start paying. Many expect the increase to drive up labour costs, especially in sectors that rely on part-time or lower-paid staff. In response, some companies are considering investing in automation or relocating operations abroad to mitigate rising costs and maintain competitiveness.

Barclays has suffered a significant legal setback in a case that could have far-reaching implications for the UK car finance industry. The High Court has rejected the bank’s judicial review of a decision made by the Financial Ombudsman Service (FOS), strengthening the position of car finance customers seeking compensation for mis-sold loans.

The case centered on a £1,327 compensation order issued to Barclays in January, following a complaint by Jenna Lewis, who had purchased a second-hand Audi for £19,133 in 2018. The car was financed with a £13,333 loan from Barclays, arranged through the car dealer Arnold Clark. Lewis argued that she had not been properly informed about the commission arrangement between the dealer and the bank. Specifically, she claimed that the dealer had increased the interest rate to boost its own commission, a practice that was not disclosed to her at the time of the sale.

The Financial Ombudsman Service agreed with Lewis, and its decision was echoed in a similar case involving Lloyds. This ruling has played a pivotal role in prompting the Financial Conduct Authority (FCA) to launch a wider investigation into mis-selling practices in the car finance sector. The FCA’s investigation is focused on discretionary commission models, where dealers profited by charging customers higher rates. These arrangements were banned at the end of 2020, but prior to that, 14.6 million car loans were written under such agreements, totaling £8.1 billion in commissions paid by banks.

While Barclays did not seek to overturn the individual compensation owed to Lewis, the bank challenged the broader legal interpretation of consumer credit rules. However, Mr Justice Kerr dismissed Barclays’ judicial review “on all grounds,” a ruling that sent shockwaves through the industry. Following the decision, Barclays’ shares fell by 1.3%, while shares in Lloyds Banking Group and Close Brothers—also implicated in the mis-selling scandal—experienced similar declines.

A spokesperson for Barclays expressed disappointment with the ruling and confirmed that the bank plans to appeal. The ongoing FCA investigation will play a crucial role in determining the full extent of the banks’ potential liability, with RBC Capital Markets estimating that the total compensation could reach as high as £6 billion.

As legal battles continue, particularly with an October ruling by the Court of Appeal suggesting that any undisclosed commission could be considered unfair to consumers, market observers warn that banks could face even larger financial and reputational risks. The UK Supreme Court’s expected ruling next year could further increase these liabilities, with the industry bracing for continued scrutiny of past sales practices.