The Bank of England has announced it will hike interest rates to their highest in more than 13 years and indicated it believes the economy is already in recession.
The central bank had previously projected the economy would grow in the current financial quarter but said it now believes gross domestic product (GDP) will fall 0.1%.
It comes after a reported 0.2% fall in GDP in the second quarter and would mean the economy is currently in recession.
A technical recession is when the economy shrinks for two quarters in a row.
The Bank’s Monetary Policy Committee (MPC) decided to raise rates to 2.25% - their highest since November 2008 - from 1.75%, in an effort to grapple big increases in the cost of living.
In committee minutes, it said the “tight labour with wage growth and domestic inflation” above targets called for a “forceful response”.
The decision to lift rates is a bid to keep inflation under control. It is the best tool that the Bank of England has to steer inflation - currently at 9.9% - back to its 2% target.
In the September meeting, the MPC also said inflation is now not due to soar as high as previously expected after the UK Government announced plans to freeze energy prices for households earlier this month.
Consumer Price Index (CPI) inflation is now set to peak at “just under 11%” in October. This would mark the highest inflation the UK has witnessed since January 1982.
The Confederation of British Industry (CBI) said that companies are looking to Friday’s fiscal statement to boost confidence after today's interest rate rise.
“Against the backdrop of stubbornly high inflation, another hefty rise in interest rates was largely expected,” said CBI lead economist Alpesh Paleja. “While the freezing of the energy price cap will reduce near-term peak inflation, price pressures are still set to remain strong and the MPC will be keeping a close watch in the coming months.
“With signs of an economic downturn coming down the track, firms will be looking to the fiscal statement to help perk up confidence and get more firms investing and growing.”
The Bank of England faces a “balancing act” in trying to keep inflation under control, according to British Chambers of Commerce head of research David Bharier.
“Our research shows that unrelenting inflation, largely driven by rising energy costs, is by far and away the top business concern at present.
“The Bank’s decision to raise rates will increase the risk for individuals and organisations exposed to debt burdens and rising mortgage costs – dampening consumer confidence.”
He added that businesses want a “plan to address the short-term drivers of inflation as well as a long-term strategy to promote investment”.
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