The Bank of England has warned the UK could fall into its longest recession since the financial crisis and predicts inflations will peak at more than 13 per cent.
It comes after the Bank's base interest rate soared from 1.25 per cent to 1.75 per cent - the biggest rise since 1995 - in a bid to curb the runaway inflation. Furthermore, Consumer Prices Index inflation may hit 13.3 per cent in October - its highest peak in more than 42 years - if Ofgem raises the price cap on energy bills to around £3.450, according to Bank of England forecasters.
Talking about Britain's current economic situation, the Bank said on Thursday: "Growth is very weak by historical standards." It is believed that household incomes will drop for two years in a row by 1.5 per cent this year and 2.25 per cent - the first time such a thing has happened since records began in the 1960s.
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Despite this, the recession will not be as severe as it was following the 2008 crash with GDP dropping by 2.1 per cent from its peak. Bank officials noted that the depth of the drop is more comparable to the recession in the early 1990s.
Projections also predict that unemployment will begin to rise again next year while inflation is expected to come back under control in 2023 - dropping below two per cent towards the end of the year. “The United Kingdom is now projected to enter recession from the fourth quarter of this year,” the Bank’s Monetary Policy Committee, which sets interest rates, (MPC) said.
“Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.” According to the Bank, GDP is set to increase by 3.5 per cent this year which is different from previous projections of 3.75 per cent.
Following this, it will contract 1.5 per cent next year alongside 0.35 per cent in 2024. All but one member of the MPC voted for the base rate to rise by 0.5 percentage points to 1.75 per cent, placing rates at their highest point since January 2009.
The MPC remarked that pressure from inflation had become worse since the committee last met, largely influenced by a near doubling in wholesale gas prices since May. Households are likely to feel the full force of price increases with the Bank predicting that the price cap on energy bills will rise from £1,971 to £3,450 for the average household in October.
Similar price hikes have been predicted by energy consultancy firm Cornwall Insight which predicts prices to reach £3,616 in January and £3,728 in April while some other companies believe it could go even higher.
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