Recession ahead

Interest rate hits 1.75% amid 13% inflation alert

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Living costs are rising

The Bank of England hiked the cost of borrowing with a rise in interest rates from 1.25% to 1.75% and said the UK was heading into recession this year.

It is the biggest single rate rise since 1995 and means Interest rates are now at their highest level since December 2008 .

It came amid warnings from the Bank that inflation will hit 13% and one think tank saying it could potentially rise to 15% early next year.

The economy is forecast to shrink in the last three months of this year and keep shrinking until the end of 2023.

The Bank’s nine-strong monetary policy committee (MPC) voted 8-1 in favour for a 50 basis point interest rate rise.

An increase of between 0.25 and 0.5 basis points had been priced in by market analysts after the Bank said it would act forcefully to tackle the rising cost of living.

Soon after the mid-day announcement, the blue chip FTSE 100 index was trading 34 points higher at 7,479.

“Underlying UK GDP growth has slowed and the UK economy is forecast to enter recession later this year,” the Bank said.

“Output is projected to fall in each quarter from 2022 Q4 to 2023 Q4,” – the longest slump since the financial crisis and more drawn out than the Covid-19 pandemic.

The economy will shed 2.1% over the entire downturn, around the the same amount of output lost in the sterling-crisis driven recession in the early 1990s.

Bank governor Andrew Bailey said the risks around its forecasts are “exceptionally large” and blamed energy prices rises an Russia’s invasion of Ukraine.

On an annual basis, the economy will contract in both 2023 and 2024.

Mr Bailey said he knew the cost of living squeeze was difficult but if it didn’t raise interest rates it would get “even worse”.

Analysts are divided over the short term direction of interest rates. Capital Economics thinks the Bank will ultimately have to lift rates to 3%, while Pantheon Macroeconomics says they are likely to peak at 1.75%.

The Resolution Foundation think tank said the Bank had previously steered analysts towards inflation above 11% in October.

Jack Leslie, a senior economist at the foundation, said while some other commodity prices had fallen in the past month, the cost of gas was weighing on inflation projections.

Bank of England
The Bank of England committee voted 8-1 for today’s rise (pic: Terry Murden)

“The outlook for inflation is highly uncertain, largely driven by unpredictable gas prices, but changes over recent months suggest that the Bank of England is likely to forecast a higher and later peak for inflation — potentially up to 15% in early 2023,” he said.

Since December, the bank has raised interest rates in 0.25-percentage-point increments, but a higher rise would come as no surprise.

MPC members are now caught between controlling inflation and tipping the economy into recession.

The energy price cap is now expected to hit £3,358 in October and rise again to £3,615 in January.

Chancellor Nadhim Zahawi said: “Along with many other countries the UK is facing global economic challenges and I know that these forecasts will be concerning for many people.

“Addressing the cost of living is a top priority and we have been taking action to support people through these tough times.”

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