The Bank of England forecasts households' post-tax income to fall in real terms this year and next. Photo / 123RF
The Bank of England forecasts households' post-tax income to fall in real terms this year and next. Photo / 123RF
Britain faces a protracted recession and the worst squeeze in living standards in more than 60 years after the Bank of England raised interest rates sharply and forecast inflation would hit 13 per cent by the end of the year.
The Bank's nine-member Monetary Policy Committee voted 8-1 to raiseinterest rates by 0.5 percentage points to 1.75 per cent on Thursday, the biggest increase in 27 years.
The BoE's move followed similarly aggressive steps by the European Central Bank and US Federal Reserve in the face of soaring inflation.
But its grim forecasts suggested Britain was facing a much bleaker economic outlook than either the US or eurozone.
Households are more exposed to the energy price shock than in the US, and less protected by government measures than in the eurozone, while the UK economy has also been damaged by the effects of leaving the EU.
The Bank forecast the country would slide into a 15-month recession later this year, with GDP shrinking by more than 2 per cent from peak to trough.
Consensus Economics, which averages leading economists' forecasts, projects the US will grow by 1.5 per cent and the eurozone by 1.7 per cent in 2023.
The BoE said that because of the latest surge in gas prices, driven by Russia's restriction of supplies, it now expected inflation to rise above 13 per cent at the end of the year — much higher than its May forecast.
It would remain at "very elevated levels" throughout 2023 before falling back to the 2 per cent target in two years' time.
"There is an economic cost to the war. But it will not deflect us from setting monetary policy to bring inflation back to the 2 per cent target," BoE governor Andrew Bailey said after the decision.
The Bank of England, the central bank of the United Kingdom, has forecast a 15-month recession. Photo / 123RF
The BoE forecasts showed that households' post-tax income would fall in real terms in both 2022 and 2023, even after factoring in the fiscal support the government announced in May.
The peak-to-trough decline of more than 5 per cent in household income would be the worst on record, with data stretching back to the 1960s.
The BoE also now expects a longer and deeper recession than it forecast in May.
It said the economy would shrink from the fourth quarter of 2022 for five successive quarters, with an overall hit to GDP similar to that seen in the early 1990s.
Even once a recovery began, the BoE said growth would be "very weak by historical standards".
Sterling weakened against the euro after the decision, reflecting speculation that a lengthy recession would limit the scale of future rate rises.
Its forecasts showed that inflation would hover near double digits for at least the next year but could fall below the 2 per cent target by the end of 2024 even if the central bank took no further policy action.
The bleak forecasts led to angry political recriminations.
Rachel Reeves, the shadow chancellor, said they were "further proof that the Conservatives have lost control of the economy" while candidates for the Tory leadership were "touring the country announcing unworkable policies that will do nothing to help people get through this crisis".
The BoE is under growing pressure from foreign secretary Liz Truss, who said on Wednesday she would look to change its mandate if she becomes prime minister.
But Rishi Sunak, former chancellor and her rival for the Tory leadership, said the projected surge in inflation reinforced his claim that Truss would be reckless to increase borrowing and cut taxes now.
"The bank has acted today and it is imperative that any future government grips inflation, not exacerbates it," he said. "Increasing borrowing will put upward pressure on interest rates, which will mean increased payments on people's mortgages."
Sunak's team said the 0.5 percentage point rise in interest rates would cost the Treasury more than £6bn in higher debt servicing costs.
Truss has claimed that Sunak is partly responsible for pushing Britain towards recession because of the series of tax rises he introduced as chancellor.
