Bank of England hikes interest rates and warns UK to enter recession with inflation to pass 13% – as it happened

5.14pm BST

Closing post

Time to wrap up, with a quick summary

The Bank of England has warned that the UK will start falling into a recession that will last over a year, as soaring energy prices continue to hammer the economy.

The BoE forecast the UK economy would shrink in the last quarter of this year, and steadily through 2023, the longest downturn since the 2008 financial crisis, in a grim economic outlook.

UK GDP is expected to fall by 2.1% from peak-to-trough, similar to the recession of the early 90s.

Consumer price inflation is now set to hit 13% per year once the energy price cap is lifted later in October. And households face a very painful two-year fall in real incomes, with wages not expected to keep up with prices.

The Bank warned:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

Despite the looming recession, the Bank voted 8-1 to raise interest rates to a new 13-year high.

Bank Rate is being hiked by 50 basis points, the biggest upward move since 1995, as the Bank tries to avoid inflation becoming embedded.

Governor Andrew Bailey insisted that the BoE has to battle inflation, as the poorest will suffer most.

“If we don’t act, inflation will become more embedded, it will get worse and we will have to raise interest rates by more — we have to act if we’re going to stop that.”

He told reporters in London that the rise in gas prices due to the Ukraine war was the main factor driving up inflation.

“There is an economic cost to the war.

“But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target.”

Unions argued that companies should rein in their profits, rather than pumping up inflation through higher prices, and give workers the pay rises they need.

Economists have predicted that rates will keep rising, with another 50-basis rise in September possible.

The Bank faced criticism over its handling of inflation, which is already more than four times its 2% target.

Attorney General Suella Braverman said Liz Truss would review the Bank’s mandate if she become prime minister, including its “entire exclusionary independence over interest rates”.

Does the Bank of England have too much power over the country's finances?

Attorney General and Liz Truss supporter Suella Braverman says Truss will "review the Bank of England's mandate"#KayBurley #ToryLeadershipRace BH pic.twitter.com/q7eKhTH2Np

— Kay Burley (@KayBurley) August 4, 2022

Bailey defended Bank independence, saying:

“One of the great strengths of being an independent central Bank is actually, you know, the political pressures have been very well managed throughout the life of the MPC in my view.

“And obviously, we’ve had many governments throughout that life. That is the best way to manage it in my view. So no, I don’t really want to put emphasis on political pressures.

“One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”

That independence is under more threat than ever before, our economics editor Larry Elliott warns:

Here’s our latest story on the Bank’s recession warning:

And here’s an explanation on the impact on consumers:

5.09pm BST

Bank of England Governor Andrew Bailey rejected the suggestion that Britain was suffering a sterling crisis, and said recent moves in foreign exchange markets were better understood as a period of dollar strength.

“It is not a crisis in my view at all,” he told Bloomberg TV.

“When you look across currencies, the common theme is the strength of the dollar,” he added.

Sterling has weakened by around 10% against the U.S. dollar so far this year, but is broadly flat against the euro (which fell below parity against the dollar last month).

Sterling is not facing a crisis, Bank of England Governor Andrew Bailey tells @BloombergTV — "recently it has been more a story of dollar strength"

More: https://t.co/VEAOPWqRJ4 pic.twitter.com/1DvvVHy3wQ

— Bloomberg UK (@BloombergUK) August 4, 2022