Business

Bank of England warns the UK will fall into recession this year

By Dearbail Jordan and Michael Race

The Bank of England has warned the UK will fall into recession this year as it raised interest rates from 1.25% to 1.75% in a bid to curb soaring prices. It expects the economy to shrink in the final three months of this year and keep shrinking until the end of 2023, making it the longest downturn since the 2008 financial crisis.

It blamed the slump largely on rising gas prices following Russia’s invasion of Ukraine, warning a typical energy bill will hit £ 3,500 in October. This would mean an average household paying almost £ 300 a month on energy bills. The bank says this sharp rise in energy bills, which are set to be three times more than a year ago, will drive inflation – the rate at which prices rise – to 13%, its highest level for 42 years.

Energy bills have already risen sharply this year, squeezing household incomes and leading to slower growth for the UK economy. Russia has reduced supplies to Europe as it wages war in Ukraine and fears are growing it may switch off the taps altogether. The potential of gas supply problems has led to the wholesale price soaring, which has led to energy firms passing those costs onto customers – pushing up household energy bills by unprecedented amounts. As well as energy, households have been hit by higher petrol and diesel costs and food prices.

The bank warned UK economic growth was already slowing, adding: “The latest rise in gas prices has led to another significant deterioration in the outlook for the UK and the rest of Europe.” The interest rate rise is the sixth increase in a row as the bank battles to dampen inflation to its 2% target. Increasing interest rates is one way to try and control inflation as it raises borrowing costs and should encourage people to borrow and spend less. It can also encourage people to save more.

The bank said it knew the cost of living squeeze was difficult for many people. However, it said if high inflation lasted a long time that would make things worse.

“Inflation hits the least well off hardest but if we don’t act to prevent inflation from becoming persistent, the consequences later will be worse,” said the Bank’s Governor Andrew Bailey.

He said the bank would “act forcefully” in the future if inflation continues to rise.

However, many households will be squeezed further following the interest rate rise including some mortgage-holders. Now that rates have gone up to 1.75%, homeowners on a typical tracker mortgage will have to pay about £ 52 more a month, while those on standard variable rate mortgages will see a £ 59 increase.

It means tracker mortgage holders could be paying about £ 167 more a month compared to pre-December 2021, with variable mortgage holders paying up to £ 132 more.

 

Knight Frank Finance Managing Partner Simon Gammon said that some homeowners nearing the end of fixed-term deals were “facing a shock” when refinancing “because they are unable to borrow as much as they hoped”. “Those who are looking to buy are realising once obtainable properties are now out of reach,” he added.

Patrick Reid, a business owner in London, owes £ 25,000 on credit cards and loans and fears an interest rate rise will cost him. “At present, I repay around £ 1,800 a month but I have worked out that I will conservatively need to pay another £ 250 a month to keep up with the debts,” he said, adding: “I will simply have to tighten my belt and be extra cautious in my spending, which means all of those non-essential items will be cut from my budget.”

Joseph Rowntree Foundation Chief Economist Rebecca McDonald said “staggeringly” high inflation was “going to hit low-income families hard”.

“Many took on credit to pay their bills and are falling behind on their payments. This will be much harder to pay off with higher interest rates putting more families in financial peril.”