Closing summary
Time to wrap up.
Britain is facing the risk of stagflation after the Bank of England warned that surging energy prices will drive inflation to 10% by the end of the year as the economy stumbles.
The pound plunged to its lowest since June 2020 as the BoE hiked borrowing costs to a 13-year high. Sterling has lost 2.5 cents since the start of the day, down 2%, on track for the worst day since March 2020.
The BoE predicted that the economy could contract sharply in the last quarter of this year when the energy price cap is lifted, as the cost of living crisis hit household spending.
Announcing its fourth rate rise in as many meetings, the BoE said:
Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth.
These developments have exacerbated greatly the combination of adverse supply shocks that the United Kingdom and other countries continue to face. Concerns about further supply chain disruption have also risen, both due to Russia’s invasion of Ukraine and to Covid-19 developments in China.
The UK economy is also expected to shrink in 2023. Although it might not be a technical recession, Bank of England governor Andrew Bailey agreed that the UK faces a ‘very sharp slowdown’.
Is the Bank of England forecasting a #recession for the UK?
— Ben Chu (@BenChu_) May 5, 2022
Not a technical one (two quarters of negative quarter on quarter GDP growth).
Here's their latest forecast... 👇 pic.twitter.com/xK2nl8D9ZR
Experts agreed that the UK was on the brink of a recession, and that stagnation worries were rising.
Here’s the full story:
Our economics editor Larry Elliott explains:
Just as in the 1970s, the Bank says external factors are mainly to blame. In 1973, it was the Yom Kippur war that led to 25% inflation by mid-1975. This time it is the war in Ukraine. The Bank is pencilling in another 40% increase in the energy price cap in October, taking the average annual household bill to £2,800.
There may be arguments about whether the UK is technically heading for recession because the Bank is not forecasting two consecutive quarters of falling output – but it will certainly feel like it. Living standards are about to take their biggest hit in decades. In another echo of yesteryear, sterling took a dive on the currency markets after the Bank’s interest-rate decision.
The same energy prices which are hurting consumers drove Shell’s profits to over $9bn in the first quarter of the year.
Our Money team have pulled together a round-up of what today’s interest rate rise mean - here’s a flavour:
- 1,092,000 Number of borrowers on a standard variable rate mortgage. These home loans have an interest rate set by the bank or building society. Some are explicitly linked to the base rate so will automatically go up in line with it, but others are set at the lender’s discretion.
- £504 How much more a £200,000 variable rate mortgage will cost each year as a result of today’s increase, according to figures from UK Finance. It says a 25 basis points rise in rates adds £42 a month to repayments.
- 4.71% The average standard variable rate charged by UK mortgage lenders, according to Moneyfacts. In December 2021 this stood at 0.31%. It has not risen by as much as the base rate because not all lenders have moved in line with the base rate.
- 2.23% Lowest rate available on a 10-year fixed-rate mortgage currently. Available from Lloyds bank to people with a deposit of at least 40%.
- £2.50 Extra interest earned on £1,000 of savings – although do not assume the rate rise will be passed on to you, as in most cases it is up to the savings provider to decide whether to increase what it pays out. If your money is in a fixed-rate savings bond, you will definitely not see a rise in returns.
