Britain will plunge into a year-long recession this autumn in which households will be hit by the biggest drop in living standards on record, the Bank of England has warned.
In one of its gloomiest ever assessments of the UK’s economic outlook, the Bank’s Monetary Policy Committee (MPC) said inflation would now peak at 13.3% over the last three month of this year, with average energy bills tripling from £1,200 in 2021 to £3,500. by October.
The economy is now expected to contract for five consecutive quarters for the first time since the global financial crash of 2008.
Inflation forecasts were up sharply from the 9.4% predicted just three months ago, with prices now on track to continue rising rapidly through 2023.
This means that the cost of living crisis will continue through next year and will only start to ease in 2024, according to the Bank’s latest forecast. Real household incomes are expected to fall by around 5%, on average, over two years – the biggest drop since records began in 1960.
The disastrous figures will worry whoever becomes the next prime minister.
Liz Truss has pledged to cut taxes by billions in a bid to win over Conservative Party members, while Rishi Sunak has attacked the plan as fiscally irresponsible.
Neither candidate has outlined detailed plans for how they would support families struggling with a rapidly worsening cost of living crisis.
The Joseph Rowntree Foundation’s chief economist, Rebecca McDonald, said: “We already know that 7 million low-income families have had to sacrifice food, heating and even showers this year because they don’t have them. couldn’t afford it.
“While the government may have taken a break from acting on the cost of living emergency, these families cannot take a vacation after the year of financial scare.
“They will wonder why other urgent solutions needed to shore up family finances before winter are not yet in place.”
Labour’s Shadow Chancellor Rachel Reeves said: ‘This is further proof that the Tories have lost control of the economy, with inflation set to continue soaring, while mortgage and debt rates borrowing continue to increase.
“As families and retirees worry about how they will pay their bills, Conservative leadership candidates are scouring the country announcing unworkable policies that will do nothing to help people get through this crisis.”
Experts have said energy costs could rise further in January, with Investec predicting bills for the average household will now hit £4,210 in January when regulator Ofgem revises its price cap.
The MPC warned that there was “exceptionally significant” risk around its latest projections, and that the situation could deteriorate further if gas prices rise further.
Analysts say that scenario is increasingly likely after Russia cut supplies to Europe last month and governments across the continent began rationing supplies.
Even after economic growth begins, further suffering is to be expected, with unemployment expected to climb from 3.8% to 6.3% in 2025.
Despite the gloomy outlook, the Bank’s nine-member MPC voted eight to one in favor of raising interest rates by 0.5 percentage points to 1.75%, the highest since January 2009.
Overall, the economy is expected to contract by 2.1%, meaning the recession will be of a magnitude comparable to those of the early 1990s and 1980s, the Bank said.
When the country emerges from recession in 2024, the Bank expects growth to remain close to zero throughout the following year.
The massive rise in inflation will also hammer public finances, adding billions to public debt and interest payments on inflation-linked bonds.
Andrew Bailey, the Bank Governor, defended the rate hike, arguing that persistent inflation would be “even worse” if interest rates were not raised and that low-income households would be hit hardest .
Chancellor Nadhim Zahawi said: “Tackling the cost of living is a top priority and we have taken action to help people through these tough times with our £37billion household relief package, which includes direct payments of £1,200 to the most vulnerable families. and a £400 cut on energy bills for everyone.
“We are also taking important steps to bring inflation under control through strong and independent monetary policy, responsible fiscal and spending decisions, and reforms to boost our productivity and growth.”
More about this article: Read More
This notice was published: 2022-08-05 09:14:51