The Bank of England has hiked interest rates to one per cent and issued a dire warning that the UK will be on the verge of a recession later this year.
In the grim set of forecasts the Bank predicted that the economy will go into reverse and that inflation will peak at more than 10 per cent, adding to the cost of living crisis many are already feeling.
The effects of the Ukraine war and the crippling rise in energy prices are cited as factors that will push the economy into negative growth.
Financial markets predict interest rates will reach 2.5 per cent by the middle of next year as policymakers battle to contain inflation adding to the pain for mortgage payers and business loans.
Members of the Bank’s nine-strong Monetary Policy Committee voted 6-3 to increase rates from 0.75 per cent to one per cent – the fourth time they have voted for a rise in a row and taking rates to a level not seen since 2009.
Three members called for a bigger increase to 1.25 per cent due to worries over rocketing inflation.
The Bank ramped up its forecast for Consumer Prices Index (CPI) inflation to rise from seven per cent currently to over ten per cent in October – its highest level for 40 years – due to soaring energy prices.
The Bank predicts growth will contract in the final three months of 2022 as the cost squeeze sees households rein in their spending.
The UK is set to narrowly miss a technical recession, as defined by two quarters in a row of falling gross domestic product (GDP), but the Bank forecasts very weak quarterly growth in 2023 and a contraction as a whole next year.
Sky-high inflation will see household disposable income plunge by 1.75 per cent this year – the second highest on record – while overall real income will tumble by an unprecedented 3.25 per cent.
Rising costs will hammer household and business finances, but the Bank said “this was something monetary policy was unable to prevent”.
Most of the Bank’s policymakers believe “some degree of further tightening in monetary policy might still be appropriate in the coming months”, the Bank added.
