BRITAIN SLIDES INTO CRISIS

Bank of England hikes interest rate, warns of protracted recession as inflation surges above 13 per cent - causing biggest drop in living standards for a generation.

Inflation in Britain is forecast to peak at 13.3 per cent, the highest since 1980 and the worst among the world’s seven biggest economies. Picture: AFP

Britain is heading for a protracted recession as inflation surges above 13 per cent, causing the worst squeeze on living standards for more than 60 years, the Bank of England has warned.

In a drastic set of forecasts for the economy, the Bank said households would suffer a record two years of falling incomes as the global gas crisis pushed up energy bills.

The Bank raised its main interest rate from 1.25 to 1.75 per cent, the largest single increase since 1995, as it tried to get a grip on the inflationary spiral.

Households’ real income, which is the value of pay after adjusting for inflation, will drop by 1.5 per cent this year and 2.25 per cent next year, the biggest fall since records began in the 1960s.

Inflation is over 9%. We expect it to rise further this year to around 13%, due to higher energy bills. https://t.co/389XbdQZWf#MonetaryPolicyReport#Inflationpic.twitter.com/KNTgqqEU7Z

— Bank of England (@bankofengland) August 4, 2022

Andrew Bailey, the Bank’s governor, said the rise in borrowing costs was necessary to prevent inflation worsening and hitting living standards further. He blamed the “consequences of Russia’s restrictions of gas supplies to Europe” for the rise in inflation and said he had “huge sympathy” for struggling households.

“I recognise the significant impact this will have and how difficult the cost of living challenge will continue to be for households. Inflation hits the least well-off the hardest,” Bailey said. “If we don’t bring inflation rate to target, it’s going to get worse.”

But during a televised Tory leadership debate Liz Truss, the foreign secretary, claimed that the Bank’s prediction of recession was “not inevitable” and said her plan to cut taxes could stave off an economic downturn.

Today’s news from the Bank of England underlines the need for the bold economic plan that I am advocating. pic.twitter.com/il3ajRTpNJ

— Liz for Leader (@trussliz) August 4, 2022

She was challenged by Rishi Sunak, the former chancellor of the exchequer, who said it was “simply wrong” to suggest that high taxes were causing the economic downturn. “What’s causing the recession is inflation,” he added.

This is the most important question facing the country right now.

The lights on the economy are flashing red and inflation is the cause of the problem.

Only Rishi has a plan to grapple inflation. #BattleForNo10#Ready4Rishipic.twitter.com/wxfP2Xb6As

— Rishi Sunak (@RishiSunak) August 4, 2022

The developments came as:

- Analysts said energy bills could hit $7,300 a year by January after the regulator Ofgem announced changes to the price cap.

- Economists warned that recession could cost the government $70 billion in lost revenue that had been earmarked by Truss and Sunak for tax cuts.

- Bailey fiercely defended the Bank’s independence after Truss said she would review its mandate to better contain inflation.

- Labour accused Boris Johnson and Nadhim Zahawi, the chancellor of the exchequer, of being “missing in action” after it emerged that both men were on holiday this week.

The Bank has now raised interest rates six times consecutively, taking the Bank rate to its highest level since 2009. Inflation is forecast to peak at 13.3 per cent, the highest since September 1980 and the worst among the world’s seven biggest economies. Interest rates are raised to increase the cost of borrowing, which brings down demand and, in theory, prices. Inflation is expected to remain high throughout much of next year before falling back to the Bank’s 2 per cent target in two years.

Governor of the Bank of England Andrew Bailey blamed the “consequences of Russia’s restrictions of gas supplies to Europe” for the rise in inflation. Picture: AFP

The main factor causing high inflation and low growth is soaring energy bills. The cost of household gas and electricity is expected to rise in October by another 75 per cent, up from the Bank’s previous forecast of 40 per cent, to about $6,100 a year.

The forthcoming recession, which will start at the end of the year, is not expected to be as deep as the banking meltdown in 2008 but may last just as long. A recession is defined as two consecutive quarters of economic contraction.

Unemployment, which is close to a historic low at 3.8 per cent, is expected to fall further this year before picking up at the start of next year. It is forecast to pass 5 per cent by early 2024 as falling demand takes a toll on company profits.

The rate rise will increase mortgage repayments from next month for the minority of homeowners on variable mortgages, approximately two million. About 80 per cent of homeowners on fixed-rate mortgages will not notice the change until the end of their term, which is typically about five years.

The Bank will also begin to sell its government bonds next month as part of a move to quantitative tightening, removing stimulus from the economy.

During last night’s (Thursday’s) debate Truss was challenged by the audience over her plan to pay nurses, teachers and other public sector workers less in poorer parts of the country. “When somebody is asking for your vote you don’t expect to be offended,” she was told.

Under questioning, Truss admitted that her policy had not been misinterpreted, as she had claimed. But she insisted that she had acted to drop the plan “as soon there were concerns expressed about it”.

The Times