Bank of England confirms largest interest hike in over 25 years as long recession looms

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Bank of England, Recession, Interest Rates; economy
The Bank of England said the British economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis. (PA Photo)

The Bank of England (BoE) raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13 per cent.

Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75 per cent – its highest level since late 2008 – from 1.25 per cent.

The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.

MPC member Silvana Tenreyro cast a lone vote for a smaller 25-basis-point increase.

The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1 per cent, similar to a slump in the 1990s but far less than the hit from Covid-19 and the downturn caused by the 2008-2009 global financial crisis.

The British economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis.

Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3 per cent in October – the highest since 1980 – due mostly to the surge in energy prices following Russia’s invasion of Ukraine.

That would leave British households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.

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