The UK is facing a recession that will last more than a year, with the economy forecast to shrink in five consecutive quarters beginning in autumn for the first time since the global financial crisis of 2008-09, the Bank of England has warned.
The bleak prospect of negative growth is set to continue at least until the end of 2023, said the BoE. GDP is predicted to fall by 1.25% next year and 0.25% in 2024, according to the bank's baseline forecast.
Inflation is predicted to peak at 13.3 per cent in the final three months of 2022, according to the Bank’s Monetary Policy Committee (MPC). Earlier, the Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022. It is now expected to consistently remain above 10% until the middle of next year.
In an effort to stem inflation, driven by the rising cost of wholesale gas on global markets, which has doubled since May and is on course to treble domestic energy bills from £1,200 in 2021 to £3,500 by October, the Bank raised borrowing costs by 0.5 percentage points on Thursday.
The sixth consecutive hike from the Bank’s Monetary Policy Committee (MPC) since December, which raised its key lending rate from 1.25 per cent to 1.75 per cent, is the biggest increase in the cost of borrowing in 27 years.
Bank Governor Andrew Bailey warned that more interest rate rises were not ruled out.
“The committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response. All options are on the table for our September meeting, and beyond that,” Bailey stated.
The cost of living squeeze is expected to begin to ease no sooner than in 2024, according to the Bank’s latest forecasts, with real household incomes projected to decline by around 5 per cent, on average, over two years.
Andrew Bailey acknowledged the period of stagflation – a recession combined with a soaring cost of living – would cause pain particularly to the least well-off households.
As he warned that this autumn UK households will be hit by the deepest fall in living standards on record, Governor Andrew Bailey said if the bank didn't raise interest rates it would get "even worse".
“If we don’t act now to prevent inflation becoming persistent, the consequences later will be worse, and will require larger increases in interest rates. Returning inflation to its 2% target remains our absolute priority, no ifs, no buts,” Bailey said.
The higher interest rates are expected to bring the average mortgage payment up by about £50 a month, reported UK media outlets. Furthermore, the average household fuel bill may reach £300 a month, as the MPC expects an increase in the energy price cap after a review by regulator Ofgem to about £3,500 in October.
Weighing in on the news, Britain’s debt charities have called on the government to provide further subsidies for low-income households.
Labour’s shadow chancellor, Rachel Reeves, slammed the government which had had “lost control of the economy.”
Shadow work and pensions secretary, Jonathan Ashworth, told the BBC that the cost of living support announced so far was "clearly not enough".
Since 2021, in line with a global trend, energy prices in Europe have been skyrocketing. After Russia launched its special military operation in Ukraine on February 24 and Brussels slapped Moscow with several sanctions packages, the energy situation deteriorated even more. Since April 1, the price threshold for gas and electricity in the UK grew by 54%, while energy spending rose by an average of 700 pounds ($844) a year.
Energy costs could rise further still in January, with Investec predicting bills for the average household hitting £4,210 in January, after regulator Ofgem revises its price cap.