The Bank of England has issued a warning that the UK is on track to experience its longest recession since the financial crisis and that the rise in gas prices will cause inflation to reach a peak of more than 13%.
In an effort to rein in the inflationary spiral, policymakers increased the Bank’s basic interest rate from 1.25 percent to 1.75 percent—the largest single increase since 1995.
If regulator Ofgem raises the price cap on energy bills to roughly £3,450, inflation will reach 13.3 percent in October, the highest level in more than 42 years, according to the Bank’s analysts.
The cost of energy will cause the economy to enter a five-quarter recession in 2023, with quarterly GDP declines.
According to historical norms, growth following that will be “extremely poor,” the Bank stated on Thursday.
Real household earnings will decline for two years in a row due to the dismal economic situation, which will be the first time since statistics have been kept in the 1960s. They will decline by 1.5% this year and 2.5% the following.
Although the recession will be shorter than the 2008 crisis, GDP will nevertheless decline by up to 2.1 percent from its peak.
According to bank officials, the recession that began in the early 1990s was more equivalent to the depth of the dip.
The predictions indicate that unemployment will begin to increase once more from next year.
The Bank predicted that inflation would return to being under control in 2023 and fall below 2 percent by the year’s end.
The Monetary Policy Committee (MPC) of the Bank stated that “the United Kingdom is now anticipated to enter recession from the fourth quarter of this year.”
In 2022 and 2023, real household post-tax income is expected to drop precipitously while consumption growth reverses.
The Bank lowered its earlier forecast of 3.75 percent and now expects GDP to rise by 3.5 percent this year. Next year, it will shrink by 1.5 percent and by another 0.25 percent in 2024.
Real post-tax household income will decrease by 1.5 percent this year and 2.25 percent the following year, it predicted.
The base rate was increased by 0.5 percentage points to 1.75 percent with the support of all but one MPC member.
The rate is now at its highest level since January 2009.
The MPC stated that since the committee’s last meeting, inflationary pressures had gotten worse, notably as a result of the nearly doubling of wholesale gas prices since May.
Households’ finances will be severely squeezed as a result of the impact this has on energy prices.
The Bank predicted that by the end of this month, the average household’s annual cap on energy costs will increase from £1,971 to £3,450.
Further increases, to £3,616 in January and £3,729 in April, have also been forecast by experts from the energy firm Cornwall Insight. Other energy authorities believe it could go higher still.
