'National emergency' as UK to fall into longest recession since 2008 financial crisis with interest rates increasing to 1.75% in biggest hike for 27 years
Households have been told to brace for two years of tumbling incomes, with inflation set to peak at more than 13 per cent and the UK to plunge into its longest recession since the financial crisis under a damning outlook that has been described as the "final straw" for struggling businesses and families.
The Bank of England made the grim prediction as it raised interest rates from 1.25 per cent to 1.75 per cent – the biggest single hike for 27 years.
And economists warned the Bank may be forced to increase rates even further by another half point as soon as next month as it puts the need to rein in inflation over risks of deepening the looming recession.
It comes as the Bank’s Monetary Policy Committee (MPC) forecast inflation peaking at 13.3 per cent in October – the highest for more than 42 years – amid a dire outlook for UK economy.
Regulator Ofgem is expected to push up the cap on household energy bills to around £3,450 in October, with the UK to subsequently enter five consecutive quarters of recession as the Bank forecast gross domestic product (GDP) falling by as much as 2.1 per cent by the start of 2024.
“Growth thereafter is very weak by historical standards,” the Bank said.
Business groups reacted with despair, with the Scottish Licensed Trade Association (SLTA) saying the latest rate increase – the sixth since December – could be the “final straw” for many impacted.
Economic analysts warned the Bank of England had "left it far too late" to rein in inflation amid claims the decision to increase rates would not help with the cost-of-living crisis and could even "exacerbate the risk of recession".
Miatta Fahnbulleh, chief executive of the New Economics Foundation, told the BBC millions of people were already "having to borrow to get by" as inflation drives prices higher and that "people who have already been squeezed will be hit" further.
Leadership frontrunner Liz Truss has said she plans to re-examine the Bank’s independent mandate to ensure it has a “tight enough focus on the money supply and on inflation”.
Labour responded to the Bank’s warnings by urging the UK Government to scrap tax breaks on oil and gas companies to provide more help to the public with rising bills. Shadow Treasury minister Pat McFadden said the Government “must act fast” to avoid one of the worst recessions since the 1990s.
The SNP warned of a “double-whammy” hit to households in coming months, as the party blamed the Government for a “lack of action” on both the energy cap and increasing interest rates.
SNP deputy Westminster leader Kirsten Oswald said: “This double-whammy hit will only exacerbate the economic fears households have, with wages stagnating and the prices of goods and services rapidly rising across the board.
“It’s no coincidence that the UK is one of the hardest hit countries in terms of energy bills. We’re facing a Tory-made cost of living crisis that the Conservatives have been too mired in sleaze and scandal to sort out.
“With these changes we’ll see households struggle even more, with savings obliterated and incomes threatened by a looming recession – this will undoubtedly be a grim time for millions, we need real action and leadership.”
Scottish Labour leader Anas Sarwar described the Bank’s decision to raise interest rates as a “national emergency”, adding: “People are already struggling and it’s going to get worse.
“The response from our governments must match the scale of the crisis.”
The interest rate rise will increase borrowing costs for millions of people, including those who have tracker rate mortgages.
The dire economic conditions will also see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s. They will drop by 1.5 per cent this year and 2.25 per cent in 2023.
However, the recession will at least be shallower than the 2008 crash, the Bank forecast, with GDP dropping up to 2.1 per cent from its highest point.
Bank officials said the depth of the drop was more comparable to the recession in the early 1990s.
The runaway costs have been largely attributed due to the soaring price of energy, as the fallout from Russian president Vladimir Putin’s war against Ukraine forced gas prices skywards.
Mr Bailey said there was an “economic cost to the war” in Ukraine.
“Inflation hits the least well-off hardest,” he said. “But if we don’t act now to prevent inflation becoming persistent, the consequences later will be worse, and will require larger increases in interest rates.”
Joseph Rowntree Foundation chief economist Rebecca McDonald said: “We already know seven million low-income families had to sacrifice food, heating, even showers, this year because they couldn’t afford them.
“While the Government might have taken a break from acting on the cost-of-living emergency, these families can’t take a holiday from the year of financial fear.
“They will be wondering why further urgent solutions needed to shore up family finances ahead of the winter are not yet being put in place.”
Myles Fitts, financial health spokesperson for Citizens Advice Scotland, said: “So many households in Scotland are struggling to make ends meet already. With energy bills, petrol costs and other payments higher than ever while wages stagnate, CABs are seeing increasing numbers of people who are just unable to cope.
“Today’s rise in interest rates will hit such people hard, making it even harder for them to meet their daily living costs. Governments need to recognise the scale of the crisis and make more support available to those who are struggling."
With businesses already battling a slow recovery from the Covid pandemic, the SLTA warned the interest rate hike could be too much for some smaller firms to bear.
Colin Wilkinson, SLTA managing director, said: “The last thing businesses need just now is for the Bank of England to increase the interest rate to its highest level since December 2008. Businesses have been feeling the squeeze since the pandemic hit two-and-a-half years ago and are already grappling with paying off debts incurred during Covid. This could be the final straw.
“Many businesses have also incurred extra costs in finding staff who left the hospitality industry during the pandemic and because of Brexit, while those beginning to find their groove again over the summer have seen their efforts thwarted by ongoing train strikes.
“At a time when the Scottish hospitality industry should be upbeat with the festival season under way and warm, sunny weather encouraging people to get out and about again, the mood is decidedly downbeat as business owners speculate over what the next barriers to recovery will be.”
Andrew McRae, the Federation of Small Businesses’ policy chair for Scotland, said policy makers needed to cut small firms some slack and take “long-awaited” action on energy bills, to give neighbourhood firms some of the protections afforded to households.
The plea comes after Ofgem announced the energy price cap would be updated quarterly, rather than every six months, warning customers faced a “very challenging winter ahead”.
The changes are designed so that any fall in wholesale prices is passed on in full to customers and more quickly, but also means consumers are less shielded from rising prices in the short term.
Conor Forbes, director of policy with Advice Direct Scotland, said: “Unfortunately, bills are going to soar in October just as winter arrives – and we can expect further rises in January.
“The key advice to everyone in Scotland is not to struggle alone."
A Scottish Government spokesperson said: “Many Scottish households and businesses will be concerned about the latest interest rate rise.
“The Scottish Government recognises the growing pressures on family budgets and has allocated almost £3 billion in this financial year which will contribute to helping mitigate the increased cost of living. This includes raising the Scottish Child Payment to £25 per child per week and extending it to under 16s by the end of 2022, as well as providing access to free childcare, baby boxes, prescriptions, travel and social security payments not available anywhere else in the UK.
“To help businesses the Scottish Government is urging the UK Government to provide additional support in areas such as energy costs, business debt and managing vacancies.”
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