The Bank of England has warned that the UK could enter its longest recession on record as its Monetary Policy Committee [MPC] hiked interest rates to three per cent.
The MPC raised interest rates by three quarters of a percentage point from its previous standing of 2.25 per cent, the largest single jump since 1989.
The increase has seen interest rates themselves reach their highest point since the global financial crisis of the late 2000s, during which they hit a peak of 5.75 per cent in July 2007.
The decision comes as households and the economy continue to feel the bite of rampant inflation, which remains at a 40-year high of 8.8 per cent.
The Bank forecasts that if interest rates continue to increase, those whose fixed-rate mortgage deals are expiring could see their annual payments rise by as much as £3,000, exacerbating the squeeze on some households.
The Bank of England had previously forecast that the country would enter recession at the end of 2022 and experience a downturn for the entirety of 2023.
However, it now believes that the UK entered recession during the summer and expects this to persist running into the first two quarters of 2024.
The recession will not be the longest ever experienced in the UK, but it is to be the lengthiest since records began in the 1920s.
The Bank expects unemployment to double by 2025 as recession bites, reaching 6.5 per cent. It is currently at a 50-year low of 3.5 per cent.
Chancellor Jeremy Hunt said that rising prices were “weighing heavily on families, pensioners and businesses” and the government's number one priority was to get a grip on the situation.
Hunt said: “Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin's invasion of Ukraine.
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.”
Elsewhere, Labour shadow chancellor Rachel Reeves expressed concern that households would not be able to absorb the knock-on effect on mortgage repayments when food prices and energy bills are also on the rise.
Photo by Michael C. - Own work, Public Domain on Wikimedia Commons
