The Bank of England has warned that household incomes are facing two years of declines, with inflation hitting more than 13 percent and the economy plunging into its longest recession since the financial crisis.
The bank made grim predictions as it raised interest rates to 1.75% from 1.25%, the biggest increase in 27 years. The move, aimed at controlling inflation, puts more pressure on mortgage holders.
In a grim outlook for the UK economy, the Bank’s Monetary Policy Committee (MPC) has forecast inflation to hit 13.3% in October, the highest in more than 42 years.
Runaway spending is largely due to rising energy prices, as Russian President Vladimir Putin’s war on Ukraine has forced gas prices to skyrocket.
Regulator Ofgem is expected to raise the cap on household energy bills to around £3,450 in October, the bank said.
Energy prices will help trigger a five-quarter recession as the bank forecasts gross domestic product (GDP) to shrink in every three-month period from October to the start of 2024. GDP will fall by 2.1 percent, the bank said.
The report paints a clear picture for households. Despite the current government’s support, their after-tax income on a real basis is set to decline by 1.5% this year and 2.25% next.
It would be the first time that household income has declined for two consecutive years since records began in the 1960s.
Rebecca McDonald, chief economist at the Joseph Rountree Foundation, said: “We already know that seven million low-income families have had to sacrifice food, heating, even showers this year because they couldn’t afford them. .
“While the government may have taken a break from acting on the cost-of-living emergency, these families cannot take a break from a year of financial fear.
“They may be wondering why there aren’t more immediate solutions to shore up family finances before winter.”
He added that the increase in interest rate will also put pressure on house owners.
Bank Governor Andrew Bailey insisted that the rise from 1.25% to 1.75% – taking rates to their highest level since January 2009 – was necessary to keep inflation under control.
“Inflation is the least affected. But if we don’t act now to prevent inflation from becoming permanent, the consequences later will be worse, and that will require a big increase in interest rates.” ,” They said.
The bank said the economy would at least avoid the depths of the 2008 or Covid-19 crashes, which took a heavy toll on GDP.
The decline would be more comparable to the recession of the early 1990s.
Mr Bailey said there was an “economic cost of war” in Ukraine.
“But I have to be clear, this will not prevent us from setting monetary policy to bring inflation back to the 2 percent target,” he said.
The bank’s latest forecast is for inflation to come back under control in 2023, falling below 2% by the end of the year.
He also predicted that unemployment would start to rise again next year.
The bank said GDP would grow by 3.5 percent this year, revising its previous projection of 3.75 percent downward. It will then shrink by 1.5 percent next year and another 0.25 percent in 2024.
The decision to set the interest rate at 1.75 percent was almost unanimous. Only one member of the MPC, which sets rates, voted for a small increase in the base rate.
The predictions are expected in the ongoing race for the leadership of the Conservative Party.
Front-runner Liz Truss has said she plans to re-examine the bank’s independent mandate to ensure it has “adequate focus on the money supply and inflation”.