The Bank of England hiked interest rates for the eighth time in a row on Thursday (November 3) to 3% from 2.25%.
It's the highest rate for 14 years, and decision makers warned that more hikes are likely. The move will help pile around £3,000 per year on to mortgage bills for those households that are set to renew their mortgages, the Bank said.
The Bank also warned that the UK could be on course for the longest recession since reliable records began in the 1920s. Gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.
Read more: Bank of England hikes interest rates to 3 percent - here is what it means for your mortgage
The economy has faced similarly long recessions in the past, but then the quarterly drops have been broken up with an occasional positive quarter. However the Bank cautioned that this forecast is based on interest rates reaching as high as 5.2%, which the Bank said it does not necessarily expect to happen.
It could be a drawn-out recession, but will be less than half as severe as the 2008 financial crisis, the Bank said. The all-important decision was made by the Bank in a bid to control inflation amid the crippling cost of living crisis - but what is the relationship between interest rates and inflation?
By increasing interest rates, people borrow and spend less money. This slows the economy down and means companies can't put their prices up as quickly.
The Bank of England website explains: "We know that higher rates will be hard for people. But it’s better for everyone in the long run to have low and stable inflation. We need to raise rates to achieve that. Otherwise, the problem will get worse and, in the end, we’d need to raise interest rates by even more."
The bank had previously forecast inflation to peak at 13% in the third quarter of this year, but with the government’s support on household energy bills the forecast was slashed to 10.9%. The government has said that the energy support – which currently caps bills at 34p per unit of electricity and 10.3p per unit of gas – will be reviewed next April, instead of running for two years as previously promised.
Assuming that some support will remain in place for the full two years – albeit half as generous from April next year – the Bank forecast that inflation would drop to 5.25% next year before dropping to 1.5% in 2024.
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