Britain faces a protracted recession and the worst squeeze on living standards in more than 60 years, the Bank of England warned on Thursday even as it raised its key interest rate to its highest since the onset of the global financial crisis.
Eight of the monetary policy committee’s nine members voted to raise interest rates 0.5 percentage points to 1.75 per cent, mirroring the aggressive steps already taken by the European Central Bank and US Federal Reserve in the face of soaring inflation.
Silvan Tenreyro, an external member, voted against the majority for a smaller 0.25 percentage point rise.
The BOE said that because of the latest surge in gas prices, it now expected inflation to rise above 13 per cent at the end of the year — much higher than its May forecast — and to remain at “very elevated levels” throughout 2023 before falling back to the 2 per cent target in two years' time.
The near doubling of wholesale gas prices since May could push the typical annual household fuel bill from roughly £2,000 to about £3,500 when regulated prices rise in October, the BOE said.
With wages rising at about half the rate of inflation, its forecasts showed that households’ post tax income would fall in real terms in both 2022 and 2023, even after factoring in the fiscal support the government had announced in May.
The peak to trough decline of more than 5 per cent in household income would be the worst on record, with data stretching back to the 1960s.
