As it raised interest rates by the highest in 33 years, the Bank of England said the UK is facing its most prolonged recession since records began.
It warned that the UK would have a “tough” two-year slump and that by 2025, unemployment would have almost doubled.
Andrew Bailey, the head of the bank, said that things would get hard for UK households but that the government had to act quickly or things would worsen later.
It raised interest rates from 2.25 percent to 3 percent, which was the most significant jump since 1989.
The Bank is trying to stop prices from increasing by raising interest rates. This is because the cost of living is going up at its fastest rate in 40 years.
Food and energy prices have increased partly because of the Ukraine war. This has made life difficult for many people and is starting to slow down the economy.
When a country’s economy shrinks for two consecutive three-month periods or quarters, this is called a recession.
Companies usually make less money, wages decrease, and unemployment rises. This means the government will get less tax money for things like health care and education.
The Bank had previously said that the UK would go into recession at the end of this year. And that it would last for the whole of next year.
But it now thinks that the economy is in a “challenging” downturn that started this summer. And will last through next year and half of 2024, which could be a year with a general election.
The UK’s worst recession since the 1920s
The Bank said this wouldn’t be the UK’s worst recession, but it would be the longest since the records began in the 1920s.
Unemployment rate is at its lowest in 50 years, but will go up to nearly 6.5%.
Since former Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng released their controversial mini-Budget in September, this is the first news about interest rates.
Their plans for unfunded tax cuts worth £45 billion, which have been rolled back. This sent the pound’s value down and caused market chaos, so the Bank of England had to step in to calm things.
Mr. Bailey told the BBC that the mini-budget had hurt the UK’s reputation abroad.
He said that it was clear that the UK’s position and reputation had been hurt at a recent International Monetary Fund meeting in Washington.
During the same week, Mr. Kwarteng was fired from his job as Chancellor.
With the most recent rate hike, the Bank’s eighth since December, borrowing costs are now at their highest level since 2008, when the UK banking system was close to failing.
The Bank thinks that raising interest rates will make it more expensive to borrow money and make people less likely to spend money, which will relieve price pressure.
But while savers will be happy about the latest rate hike, it will hurt people who have mortgages, credit card debt, or bank loans.
People are worried
UK residents with mortgage loans worry about the economic realities. The Bank thinks that those whose fixed-rate deals are ending could see their annual payments go up to £3,000 if interest rates keep increasing.
It said that the interest rates would go up if inflation stayed high. The financial markets thought that rates would reach their highest point at 5.25 percent. But the Bank thinks they will only go this high.
The Bank of England will decide on the interest rate before the government announces its plans for taxes and spending at the Autumn Statement on November 17.
In response to the Bank’s warnings, the pound’s value fell by 2% against the dollar on Thursday. And the cost of borrowing money from the government went up.
After a series of U-turns, government borrowing costs and the pound’s value have somewhat recovered. However, mortgage markets and business loans still show signs of stress, which adds to the long-term economic hit.
According to the forecast, the unemployment rate will go up, and household incomes will go down.
The economy is going through a rough time, and the UK is doing worse than the US and the Eurozone.
Experts predicted a sharp energy recession, but now anticipate a shallower and longer energy and mortgage shock.