The UK is on the verge of falling into its longest recession since the financial crisis and inflation will peak at over 13% as gas prices soar, the Bank of England has warned.
Policymakers raised the Bank’s base interest rate from 1.25% to 1.75%, the biggest hike since 1995, as they tried to control runaway inflation.
Consumer price index inflation will hit 13.3% in October, the highest in more than 42 years, if regulator Ofgem raises the price cap on energy bills to around £3,450, Bank forecasters said.
Energy prices will drag the economy into a five-quarter recession, with gross domestic product (GDP) shrinking every quarter in 2023.
“Growth thereafter is very weak by historical standards,” the Bank said on Thursday.
Dire economic conditions will see real household incomes fall for two consecutive years, the first time since records began in the 1960s. They will fall 1.5% this year and 2.25% next .
However, the recession will be at least shallower than the crash of 2008, with GDP falling as much as 2.1% from its peak.
Bank officials said the depth of the decline is more comparable to the recession of the early 1990s.
Unemployment will begin to rise again next year, according to projections.
The Bank said it expects inflation to come back under control in 2023, dropping below 2% towards the end of the year.
“The UK is now expected to enter recession from the fourth quarter of this year,” the Bank’s Monetary Policy Committee (MPC) said.
“Real after-tax household income is expected to fall sharply in 2022 and 2023, while consumption growth will turn negative.”
GDP is expected to grow 3.5% this year, the Bank said, revising down its previous projection of 3.75%. It will then contract by 1.5% next year, then by another 0.25% in 2024.
Meanwhile, real after-tax household income will fall 1.5% this year and 2.25% next, he said.
All but one member of the MPC, which sets interest rates, voted to raise the base rate by 0.5 percentage points to 1.75%.
It places rates at their highest level since January 2009.
The MPC said inflation pressures had intensified since the committee last met, largely due to a near doubling in wholesale gas prices since May.
As this affects energy prices, households will face a severe squeeze on their budgets.
The Bank expects the price cap on energy bills to rise from £1,971 to £3,450 a year for the average household in October.
Experts at Cornwall Insight, an energy consultancy, also predicted further rises, to £3,616 in January and £3,729 in April. Other energy experts believe it could rise further.
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