The Bank of England has warned the UK will fall into recession as it raised interest rates by the most in 27 years, reports BBC.
The economy is forecast to shrink in the last three months of this year and keep shrinking until the end of 2023.
Interest rates rose to 1.75% as the Bank battles to stem soaring prices, with inflation now set to hit over 13%.
Governor Andrew Bailey said he knew the cost of living squeeze was difficult but if it didn’t raise interest rates it would get “even worse”. The main reason for high inflation and low growth is soaring energy bills, driven by Russia’s invasion of Ukraine.
The expected recession would be the longest downturn since 2008, when the UK banking system faced collapse, bringing lending to a halt.
The slump is not set to be as deep as 14 years ago but may last just as long.
The Bank’s governor Andrew Bailey said he had “huge sympathy and huge understanding for those who are struggling most” with the cost of living.
“I know that they will feel, ‘Well, why have you raised interest rates today, doesn’t that make it worse from that perspective in terms of consumption?’, I’m afraid my answer to that is, it doesn’t because I’m afraid the alternative is even worse in terms of persistent inflation.”
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.
However, many households will be squeezed further following the interest rate rise including some mortgage holders.
Now rates have gone up to 1.75%, homeowners on a typical tracker mortgage will have to pay about £52 more a month. 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. Interest rates have risen six times in a row since the end of last year.
Higher interest rates also mean higher charges on things like credit cards, bank loans and car loans.
Patrick Reid, a business owner in London, owes £25,000 on credit cards and loans and fears an interest rate rise will cost him.
Written by Adekunle Biodun