The UK is heading for a protracted recession which could last for more than a year, the Bank of England has predicted, as it warned inflation could rise as high as 13%.
The Bank said it expects the country to fall into recession in the final quarter of this year, with the economy continuing to shrink until the end of 2023. It would make the impending recession the longest downturn since the 2008 financial crisis.
The central bank made its forecast as it announced its largest interest rate hike for 27 years, raising rates by half a percentage point from 1.25% to 1.75% in an attempt to tackle spiralling inflation. Rising inflation means that households are likely to experience the biggest fall in living standards since the 1960s, with household real income to drop by 1.5% and 2.25%.
Andrew Bailey, the Bank’s governor, said the rise in borrowing costs was necessary to prevent inflation from rising out of control and further harming living standards. The governor blamed the “consequences of Russia’s restrictions of gas supplies to Europe” for the rise in inflation and said he had “huge sympathy” for struggling households.
“I recognise the significant impact this will have and how difficult the cost of living challenge will continue to be for households. Inflation hits the least well-off the hardest,” Bailey said. “If we don’t bring inflation rate to target, it’s going to get worse.”
During a televised Tory leadership debate Liz Truss, the foreign secretary and Conservative leadership hopeful, claimed that the Bank’s prediction of recession was “not inevitable” if “bold” action was taken, and said her plan to cut taxes avert a recession.
But rival Rishi Sunak, the former chancellor, challenged Truss on the issue and said it was “simply wrong” to suggest that high taxes were causing the economic downturn, and pointed instead to inflation.
To find out how closely you’ve been paying attention to the latest developments in the news and other global events, put your knowledge to the test with our Quiz of The Week.
Need a reminder of some of the other headlines over the past seven days?