The UK is hurtling towards a recession but it won't be as bad as predicted, the Bank of England has said.
It said that the UK is still headed for an economic slump over five consecutive quarters, starting in the first three months of 2023.
But the Bank said it could be shallower and shorter than previously expected as wholesale energy prices begin to fall and soaring inflation starts to ease.
The UK was previously expected to enter a recession at the end of 2022, with the downturn lasting until mid-2024. It is now expected to run from the first three months of this year into the middle of next year.
Decision makers on the Bank's Monetary Policy Committee (MPC) hiked interest rates to 4% today - the tenth rise in a row - to help bring down inflation.
When the base rate goes up, borrowing money becomes more expensive - in bad news for homeowners with variable rate mortgages.
Chancellor Jeremy Hunt said inflation was the "biggest threat to living standards in a generation" and said the Government would continue to resist calls for extra spending or tax cuts.
His words are likely to anger some Tory MPs who are urging the Government to reduce the tax burden faced by Brits.
But Mr Hunt, who was brought in to solve the economic crisis triggered by ex-PM Liz Truss's disastrous stint in No10, has been resisting pressure to act in next month's Budget.
He also said the Government couldn't fund additional spending in a blow to unions pushing for public sector pay rises.
In a statement, Mr Hunt said: “Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank's action today so we succeed in halving inflation this year.
“We will play our part by making sure government decisions are in lockstep with the Bank's approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
Shadow Chancellor Rachel Reeves said Brits would be worried about what rising interest rates will mean for their finances.
“The reality is that under the Tories growth is on the floor, families are worse off and we are stuck in the global slow lane," she said.
“We do not have to continue on this path of managed decline when Britain has so much potential to grow and thrive."
TUC general secretary Paul Nowak said the Bank of England was taking a "very big risk" with its latest rise in the cost of borrowing.
Mr Nowak said that it was now up to Chancellor Jeremy Hunt to ensure the economy did not fall into recession.
"The IMF's recession forecast for the UK should have been cause for caution but the Bank has taken a very big risk by pushing rates up, and if we spend this year in recession, working people will pay a high price," he said.
"The Chancellor now bears responsibility for keeping us out of recession. He must respond at next month's budget with an urgent spending boost to keep the UK economy moving and to keep people's jobs safe.
"And he should start with funding for public sector pay rises that keep up with the cost of living."
