Inflation will hit 10% this year, the Bank of England has warned - and energy bills could be forced to a 40-year high.
The UK economy is set to go into reverse, with rocketing energy costs expected to drive inflation up, the Bank of England has said today.
The dire forecast came as the Bank hiked interest rates from 0.7% to a 13-year high of 1%. Some of its rate-setters voted for an immediate increase to 1.25%.
The Bank is now predicting average annual gas and electricity prices, which soared to £1,971 last month, will leap again in October, to around £2,800.
That together with a global surge in commodity prices, worsened by Russia ’s war in Ukraine, will see Britain’s economy go into reverse in the final three months of this year, the Bank forecast in its latest update.
Its Monetary Policy Committee (MPC) believes the economy will then remain weak next year, and could shrink slightly.
The forecast of a dramatic slowdown will prompt fears that the economy will plunge into recession.
The MPC voted six members to three to increase its base rate - which influences what lenders charge - to 1%.
The three members voted for it to rise to 1.25%.
It is the first time the Bank has ever voted to raise rates four times in a row in the history of the MPC, going back to 1997.
The rate is set to keep rising, hitting an expected 2.5% by the middle of next year.
A series of interest rate hikes will be yet another blow for households already in the grip of a cost of living crisis.
While those on fixed rate mortgages will be shielded for now, it will drive up repayments for others on variable rates deals, those taking out new home loans, and other forms of borrowing.
The Bank now fears real households disposable incomes will fall by 1.75% this year, worse than it forecast in February and the biggest drop since records began in 1964.
Households are expected to respond by saving less.
In its update, the MPC said: “Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine.
“This has led to a material deterioration in the outlook for world and UK growth.”
The committee expects the consumer price index measure of inflation, which hit a 30-year high of 7% in March, to have topped 9% last month.
It is then predicted to reach more than 10% in the final three months of this year, the highest since 1982, driven by what the MPC forecasts will be a 40% leap in energy bills in October.
That is when regulator Ofgem is next set to increase a price cap that impacts 22 million UK households.
“Given the operation of the price cap, consumer price inflation is likely to peak later in the UK than many other economies, and may therefore fall back later” the Bank said.
However, it also projected that inflation would fall to just over 2% - the Bank’s target - in two years’ time.
It then fall as far as 1.3% in three years, it added.
Unemployment, which has been falling, is predicted to start rising again towards the end of this year.
Average wage growth is projected to be around 4%.
The global price of oil, gas, food and other raw materials have risen sharply since Russia’s invasion of Ukraine.
The situation has been made worse by Covid-related lockdowns in China, along with disruptions to supply chains.
Alice Haine, personal finance analyst at investing platform Bestinvest, said: "With the headline inflation rate already running at a three-decade high, it was little surprise that the Bank expects inflation to hit just over 9% in the second quarter of this year and over 10% at its peak toward the end of the year – a reflection of the higher energy prices following the large rise in the Ofgem price gap in April along with the projected increase in October.
"Meanwhile, the Bank expects economic growth to slow dramatically to just 0,1% in the second quarter as soaring food and energy costs and fresh supply chain disruption put the squeeze on consumer spending with the Ukraine war only amplifying the costs crunch even further.”
