Britain is heading for its longest recession in modern history with no recovery until summer 2024 the Bank of England warned on Thursday.
The bleak forecast from Bank officials came as its Monetary Policy Committee (MPC) voted 7-2 to hike its interest rate from 2.25 per cent to 3 per cent to curb inflation.
But in its report accompanying the rate decision the MPC said the UK economy faces “a very challenging outlook.”
GDP is forecast to fall 0.75 per cent in the second half of 2022 and continue in recession through 2023 and the first half of 2024 before an upturn begins.
Inflation is expected to peak at 11 per cent and unemployment at 6.5 per cent.
Chancellor Jeremy Hunt said: “Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country. That is why this government’s number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.
“Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine.
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.
“Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”
But Joshua Raymond, Director at online investment platform XTB.com said:“We’ve seen investors move quickly to strongly sell out of the pound in the immediate reaction to the Bank’s 0.75% interest rate hike, the biggest hike for 33 years.
The pound fell around one per cent against the US Dollar in volatile trade and hit its lowest levels against the euro in a week. That reaction tells you investors are disappointed not necessarily in this hike alone but the guidance from the central bank that rates won’t need to rise much further to contain higher inflation.
“We should remember that the market has long deemed the Bank of England’s response to inflation and far too slow and too weak. The new guidance is likely to be seen as a return to that interpretation.
“And the troubling part is, should the BoE be correct and not need to hike rates much further, it’s more likely to do with the severity of the recession the Bank itself says the UK is already in. That’s also bad news for the pound. ”
