With the worst outlook for the economy since the 2008 banking crash, the central bank said the UK would enter recession in the final quarter of this year but raised interest rates to 1.75% in a bid to tackle rising inflation . It was the biggest jump in borrowing costs in 27 years. Bank officials said the rise in the energy price cap to an expected £3,500 in October would be the main reason for the rise in inflation – currently at 9.4% – although the ongoing supply chain disruption that hit the world trade was another important factor in the rise in prices. The longest recession since 2008 will begin later this year, he added, with the economy shrinking throughout 2023. The protracted recession is expected to push the unemployment rate from 3.8 percent to 5.5 percent by 2024, and will marked a record decline in living standards for the year. In a blow to the next prime minister’s ambitions to grow the economy, the Bank said gross domestic product would contract by 2.1% for five consecutive quarters to leave the UK’s growth negative in both 2023 and 2024. Chancellor Nadhim Zahawi is also expected to come under immediate pressure to mitigate the worst effects of inflation on the poorest households in an emergency budget. The Treasury has said it will wait to see how much regulator Ofgem has to raise the energy price cap in October before deciding how much extra help to offer households. However, the Bank’s prediction is likely to fuel calls for a plan to protect vulnerable families before the next cap is announced. In a review of the economy, the Bank said the UK would be out of recession before the next election in 2024. However, by then living standards would have fallen by 5%, the biggest fall since records began in 1960s, the Bank said. Eight of the nine members of the Bank’s monetary policy committee (MPC) voted to raise rates by 0.5%, leaving former LSE economist Silvana Tenreyro the only member to back a smaller 0.25% rise. The MPC said inflationary pressures in the UK and the rest of Europe had intensified significantly since the Bank’s last review in May, largely reflecting “a near doubling of wholesale gas prices since May due to Russia’s supply curbs natural gas in Europe and the risk of further restrictions”. Households will have seen their energy bills triple in a year after the price cap was raised again in October. Ofgem will announce the cap at the end of this month and there has been speculation it will rise above £3,000 before rising to £3,600 in January. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk But the Bank of England said it expected wholesale gas prices to rise faster, prompting Ofgem to push the cap to £3,500 as soon as October. “The latest rise in natural gas prices has led to another significant deterioration in the outlook for activity in the UK and the rest of Europe,” the report said. “The UK is now forecast to enter recession from the fourth quarter of this year. Real after-tax household income is projected to decline sharply in 2022 and 2023,” it added.
