The Bank of England (BoE) has warned on Thursday that the UK is set to enter into five consecutive quarters of an economic contraction with a 5% drop in real terms of living standards.
This comes as Gross Domestic Product (GDP) has fallen by 2.1% and rising energy prices will push inflation above 13% and warns the UK economy will be plunged into a recession lasting for more than year.
Britons are being warned by the BoE that they are set to face a “very challenging winter ahead” as interest rates have now been increased from 1.25% to 1.75% which is the highest since January 2009.
The Bank has tightened the monetary screws as rates are now the highest since January 2009 and MPC committee voted 8-1 in favour of a hike to 1.75%, with the lone dissenter preferring a rise to 1.5%.
Inflation is now expected to reach over 13% in the final quarter of the year, up from the 11.0% expected in June.
Initial market reaction saw sterling give up some gains from earlier in the day, although markets were generally unphased by the announcement.
In the minutes of its meeting the MPC said, “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023 while consumption turns negative.
“The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.
“In view of these considerations, the Committee voted to increase the Bank Rate by 0.5 percentage points, to 1.75%.”
Nicholas Hyett, Investment Analyst, Wealth Club said, “The Bank of England is playing catch up after some bumper rate rises from the ECB and Federal Reserve in the last month. The resulting rate hike may be the largest in nearly 30 years, but it was also widely expected, and the market reaction has been modest. Instead, the real focus today is on how much further the bank is willing to go as it seeks to bring inflation back down to its 2% target.
“The current inflationary spike is being driven by global food and energy prices, and higher interest rates in the UK will do little to alleviate those pressures. Stronger sterling has the potential to provide some relief.
“However, rising rates in the US and Europe mean the BoEs actions haven’t helped the pound much, and sterling is currently trading near its weakest level against the dollar in over 40 years. The risk now is that higher interest rates start to squeeze consumer and commercial borrowers too much, strangling the life out of the economy without significantly easing the cost-of-living crisis.
“Markets still think the Bank has a rate rise or two in the tank, but to some degree UK monetary policy is now caught in global forces over which the Bank has little control. Inflation will rise or fall according to what happens in Ukraine not Threadneedle Street, and rate decisions are dictated by moves at other central banks as much as by the MPC.”