The government is facing calls to launch a fresh package of emergency financial support for households after the Bank of England warned Britain’s economy could plunge into recession before the end of the year.
As the nation went to the polls in the local elections, the Bank raised interest rates from 0.75% to 1% to tackle spiralling inflation made worse by Russia’s war in Ukraine. With a fresh jump in home energy bills expected in October, it forecast inflation would rise above 10% this year, the highest level since 1982.
The committee voted by a majority of 6 votes to 3 to raise rates by 0.25 per cent. The three dissenting MPC members wanted a bigger 0.50 per cent rise.
The Bank’s interest rate is now at its highest since March 2009 when the recession that followed the global financial crisis sent the cost of borrowing tumbling to emergency lows to keep the global economy afloat.
The Bank said Thursday’s hike was needed to reign in rampant inflation, which hit seven per cent in March and is now expected to have reach nine per cent in April when the cap on energy bills rose 54 per cent, and peak at 10 per cent in the Autumn.
It was the fourth time in a row the committee has voted in favour of an interest rate hike, as the UK grapples with soaring inflation driven by rising energy costs.
In its report on Thursday, it also warned the economy will go into reverse and inflation- will peak at more than 10 per cent as the Ukraine war compounds cripppling living costs.
The technical definition of a recession is typically two successive quarters of contraction. The Bank’s projections imply a sharp fall of nearly 1% in the final quarter of this year, as energy bills rise in line with the latest Ofgem price cap, followed by weak GDP, for most of 2023 and another quarter of contraction that autumn.
It said that unemployment would also begin to climb, with the rate rising to 5.5% by the middle of 2025.
But perhaps most striking of all its forecasts is that inflation, as measured by the consumer price index, would rise to 10.25% towards the end of this year – nearly double its previous forecast of 5.75%.
That level of inflation would be the highest the UK has faced in four decades, since the early 1980s, when Britain was at the tail-end of a long period of stagflation – high inflation and low growth.
It is easily the highest inflation forecast since the Bank was granted independence to set monetary policy in 1997.
Average gas and electricity bills are forecast to hit £2,800 when Ofgem raises its price cap to reflect a rise in wholesale energy costs, which has been exacerbated by the war in Ukraine. Prices of food and other essential goods are also expected to continue to rise, the Bank’s Monetary Policy Committee (MPC) said on Thursday.
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