The body responsible for setting interest rates in the UK has warned people that the coming year is set to be bleak with inflation hitting 13% and a recession expected.
The Bank of England issued the bleak warning as it announced on Thursday that interest rates would rise from 1.25% to 1.75% - the highest levels since January 2009. It said that it was forced to raise interest rates as inflation, which already hit a 40-year high of 9% in June this year, is expected hit 13.3% in the last three months of 2022 and remain at high levels throughout much of 2023.
The announcement painted a dire picture of the future for millions of households already facing major pressure to meet their monthly costs. The Bank forecasts that the UK will fall into recession this year and the economy is likely to keep shrinking until the end of next year - the longest economic downturn since the 2008 financial crisis.
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The Bank said that real household incomes would "fall sharply" in 2022 and 203 and that, with less money to spend, people would consume less. The news will be extremely worrying for households already struggling to cope with rising costs of living which have seen soaring supermarket prices, energy bills, fuel costs and more, and with no indication that things will improve in the near future.
The Bank of England blamed gas prices, which it said were caused by Russia's decision to limit supply, for the problems. It said the latest rise in gas prices has led to "another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe." The grim forecasts for inflation reflect a near doubling in wholesale gas prices since May.
High inflation is being caused by several factors, including energy bills, which have risen rapidly because of high oil and gas prices and are expected to increase sharply again from October; petrol and diesel prices due to the war in Ukraine driving up the cost of crude oil; food prices as the war also squeezes grain production and costs; the cost of raw materials and household goods, and higher interest rates which are impacting homeowners.
As this feeds through to retail energy prices it is likely to make the fall in real incomes for UK households even worse. Inflation is not expected to ease until the end of 2023.
UK energy regulator Ofgem has already confirmed that the energy price cap will be updated quarterly rather than every six months, and that customers face a “very challenging winter ahead”. The price cap increased by £693 in April - a 54% rise - and is likely to go up by even more in October, making energy bills even more expensive. BFY Group, a utilities consultancy, said it expects the cap on bills to hit £3,850 between January and April next year – hundreds of pounds more than prior predictions. The forecast comes after the Kremlin further strangled the flow of gas to Europe.
The increase in interest rates is also likely to worry homeowners, as it will significantly worsen the cost-of-living squeeze when it feeds through to mortgages in the coming months. This is despite the scrapping of mortgage affordability tests which came into affect on Monday, August 1.
While costs are going to continue to rise in the coming months, there is some longer term hope - BoE predicts that inflationary pressures are expected to dissipate over time. Global commodity prices are not currently expected to rise any further and tradable goods price inflation is expected to fall back, the first signs of which may already be evident. Domestic inflationary pressures are therefore expected to subside within the two-year period covered by the report, and it is hoped inflation will fall to the target figure of 2% by 2024.
However, with prices and bills likely to continue to rise into next year and experts warning that the support packages announced so far are unlikely to prevent many people plunging into poverty, this is unlikely to be of comfort to millions of households in the grip of the cost crisis.
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