The UK economy is facing its longest recession on record with food inflation at a record high and interest rates likely to rise even more. The Bank of England (BoE) announced on Thursday that it was increasing interest rates by .75% up to 3% - the highest the base rate has been since the 2008 financial crash and the biggest single hike since 1989.
The bank said its committee - which did not vote unanimously for the increase - had made the decision in order to help bring inflation down to its targeted 2% figure next year. Although rates are not predicted to reach as high as previously thought, set against a backdrop of record food inflation, energy costs 95% higher than this time last year and the impact of Brexit and the war in Ukraine, the UK economy is facing a bleak couple of years.
The latest predictions indicate the economy could fall into eight consecutive quarters of negative growth, which would be the longest period of uninterrupted decline that the nation has experienced for around a century. The coming years are likely to prove difficult for millions of households already struggling to cope with the cost of living crisis, with mortgages likely to rise further as well as unemployment, though inflation is expected to fall sharply from the middle of next year.
Read more: How interest rates rise will affect you as Bank of England hikes rate to 3%
Here are five things we learned about what to expect in the coming months after the Bank of England's announcement on Thursday.
We could face the longest recession since records began
Among the BoE's most stark predictions on Thursday was its forecast that the economy could fall into eight consecutive quarters of negative growth. A country is considered in a recession when its economy shrinks for two consecutive three-month periods. This is generally an indication that a country's economy is not doing well.
If the BoE's forecast proves correct, this would be a two-year long recession - the longest since economic records began in the UK. With food inflation, which soared to a record 11.6% in October, a 95% increase in energy prices compared to this time last year and unpredictable changes in other items like fuel, a recession had been predicted for some time. In August, when interest rates were raised to 1.75%, the Bank warned the country faced its worst recession since 2008 but predicted this would happen later in the year.
But on Thursday it revised this, saying it faced a "very challenging period" and saying the economy had already entered a recession this summer. It predicts this will continue next year and into the first half of 2024.
While this would be the longest period of uninterrupted decline for around a century, it would be a milder recession than in previous times. From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9%, a much smaller decrease than the 6.3% drop seen during the 2008 financial crisis.
Homeowners face the biggest single shock on their mortgage bills since the 1980s
The decision to hike interest rates will overwhelmingly impact those with mortgages - around a third of the UK population - and in particular those with tracker or variable deals. In September the BoE raised interest rates in from 1.75% to 2.25% – the seventh rise since December 2021 and the highest they've been in 14 years. This had an almost instant impact on those with tracker deals, with t he Financial Times using an example that a tracker rate rising from 3.5% to 4% would cost almost an extra £60 a month on a £200,000 loan.
Increasing the base rate further to 3%, as the BoE did on Thursday, means those on a typical tracker mortgage could pay about £73.50 more a month while those on standard variable rate mortgages would face a £46 jump.
The move means people taking out a new loan will soon be quoted a higher interest rate while those whose mortgages are being renegotiated will likely have to deal with larger bills than they had in the past. The Bank said households set to renew their mortgages could see them increase by around £3,000 a year, a whopping increase on top of already-spiralling costs.
Unemployment could be set to double
The Bank's predictions also show there are likely to be job losses as economic conditions worsen. When a country is in a recession, people spend less money and businesses therefore earn less. Set against rising costs such as energy, this puts pressure on purse strings and leads to job losses as firms try to cut costs.
This is likely to be the case going forward with the BoE predicting that unemployment - which at 3.5% is at its lowest rate since 1974 - is likely to almost double, rising to 6.5% in the next two years.
It said a surge demand for workers after the coronavirus pandemic had now eased somewhat and that survey measures of employment intentions had also softened, but added that this didn't point to outright falls in employment.
Inflation should fall sharply next year
The latest predictions are not all bad news, as the Bank has also predicted a much-welcome fall in the rate of inflation in 2023 and beyond. It said inflation - which measures how much the price of something rises over time - will reach 11% in the winter before dropping off next year, which will be a boost for many and their finances with inflation measured at 10.1% in September. The BoE predicts that CPI will start to fall back from early next year as previous increases in energy prices drop out of the annual comparison. While it says domestic inflationary pressures will remain strong in coming quarters, CPI inflation is projected to fall sharply to some way below the Bank's 2% target in two years’ time, and further below the target in three years’ time.
Interest rates might not go much higher
There is further good news when it comes to Thursday's increase to interest rates. When the BoE's early report was being prepared at the end of October, a peak of 5.25% was predicted but it has since fallen back to 4.75%.
But the Bank does not appear to foresee the base rate going that high. According to the minutes of its latest meeting the majority of its nine-strong monetary policy committee (MPC) believes “further increases in bank rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced in to financial markets”.
While it said increases were needed to help tackle inflation, only seven of the Bank's nine committee members voted in favour of the .75% rise, which indicates they might already be fearing the impact on the economy if borrowing gets more expensive and people are saving rather than spending. The two members who voted against .75% voted for smaller increases of .5% or .25%. With rising rates already impacting borrowing and millions of people with higher mortgage payments, the BoE is clearly keen not to overdo things ahead of the UK government's crucial autumn statement on November 17. To get all the latest money-saving news straight to your inbox twice a week sign up here.
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