The UK could be facing the longest period of recession since reliable records began a century ago, the Bank of England has warned.
The economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct – with growth only coming back in the middle of 2024.
However, it is expected to be a milder recession than in previous times. From its highest to lowest point, GDP is expected to drop 2.9 per cent – a smaller decrease than the 6.3 per cent fall seen in the 2008 financial crisis.
Bank of England governor Andrew Bailey warned it was a “tough road ahead” for Britain’s economy and households struggling during the cost of living crisis.
The Bank announced it was hiking its base interest rate by the largest amount in 33 years as it tries to get a grip on soaring inflation.
The Monetary Policy Committee (MPC) raised the base rate by 0.75 per cent to 3 per cent after warning last month that growing inflationary pressures will require a “stronger response” than previously thought.
It could 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 Resolution Foundation think tank said that by the end of 2024, 5.1 million households will have seen their mortgage costs increase substantially – with an average annual increase of £3,900 relative to autumn 2023.
Justifying the substantial rate rise, Mr Bailey said: “We do understand the difficulties of the situation we’re in and the difficulties mortgage-holders face. If we don’t take action to get inflation down, things will get worse.”
This means that fixed rate mortgages “should not need to rise as much as they have done”, according to the central bank boss.
Meanwhile unemployment is expected to peak at around 6.5 per cent, from 3.5 per cent today, slightly lower than in 2008, during the long recession
There was better news in the Bank’s inflation projection. The Bank forecast that inflation would drop to 5.25 per cent next year before dropping to 1.5 per cent in 2024.
Chancellor Jeremy Hunt said inflation is “the enemy” and the Bank had taken action to tackle it. But he said inflation was “largely driven” by Covid and Russia’s invasion of Ukraine – avoiding any mention of Liz Truss’s disastrous mini-Budget.
Mr Hunt said “the most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible”.
Labour leader Sir Keir Starmer, reacting live to the rise in interest rates, said there was a “Tory premium on mortgages” and families will “shudder” at what the interest rate hike means for their finances.
“We’re more exposed in this country, we’re paying a higher price [for inflation] in this country, because of the failure over the last 12 years,” he told Times Radio. “This, I’m afraid lies at the door of Downing Street.”
Lib Democrat leader Sir Ed Davey said the prospect of the longest recession on record was “a badge of shame” for Rishi Sunak and this Conservative government. The party said Mr Hunt must set out a plan to “save homeowners” after the rate rise.
TUC head of economics Kate Bell said workers were “paying a high price for the Conservatives crashing the economy” – saying it was time for a general election to “replace the party that created this crisis”.
Citizens Advice urged banks to show understanding for people now struggling with the “double whammy” of rising interest rates and inflation.
“This comes on top of other pressures like energy bills going through the roof and the food shop not stretching as far,” said Morgan Wild, head of policy.
The pound fell after the Bank of England’s warnings over a prolonged recession. Sterling dropped 2 per cent to 1.12 against the US dollar and was 0.7 per cent lower at 1.15 euros.
