UK facing ‘longest recession on record’

Bank sets the biggest rate rise in 30 years... then doubts its own forecast

BRITAIN is facing the longest recession on record and soaring unemployment, the Bank of England warned yesterday.

As it imposed the biggest interest rate rise in more than 30 years, it said the UK was at the start of a painful slump that could leave an extra one million workers on the dole.

But in a report that left economists scratching their heads, its officials admitted that the forecast assumed interest rates would rise higher than is likely.

The Bank suggested that leaving rates where they were – at a 14-year high of 3 per cent following yesterday’s 0.75 percentage point rise – would bring sky-high inflation back towards the 2 per cent target within two years.

However, it said it would press ahead with further rate increases to bring down the rise in the cost of living, which is currently at a 40-year high of 10.1 per cent.

Theoretically this should help keep a lid on prices as it encourages saving rather than spending.

But it also ramps up the cost of debt for mortgage holders and other borrowers, as well as putting a dampener on economic output.

As it tries to get a grip on the cost of living crunch amid worries that there could be more surprises in store, the Bank vowed to keep lifting rates. Bank governor Andrew Bailey said: ‘If we do not act forcefully now it will be worse later on.’

When the Bank’s Monetary Policy Committee (MPC) met this week to decide where to pitch the rate, traders were expecting it to peak at 5.25 per cent next year.

If this happened, the Bank said, the economy would tip into the longest recession seen since records began in the 1920s. Unemployment would rise from 3.5 per cent to 6.5 per cent, and households income – taking inflation into account – would fall both this year and next.

This forecast is a major headache for Chancellor Jeremy Hunt, who is trying to fill a £50billion hole in the public finances and will be hoping for a healthy economy.

But the Bank cast doubt on its own forecasts as it said traders would be misguided to think interest rates would hit 5.25 per cent.

In the minutes of its latest MPC meeting it said: ‘Further increases in Bank Rate might be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.’

Michael Hewson, of the online trading platform CMC Markets, said: ‘The key message was that rates were unlikely to go anywhere near as high as markets were pricing, although they were still expected to rise, and that the UK economy was likely to face a two-year recession.’

The MPC produced an alternative forecast based on the base rate staying at 3 per cent – predicting that the recession would be shorter, inflation would still be back below target in three years, and unemployment would hit 5.25 per cent.

In reality, this is not going to happen either as the Bank has vowed to keep lifting interest rates until inflation is back under control and heading towards its 2 per cent target.

The most probable outcome for the economy is likely to be somewhere between the two scenarios.

Simon French, an economist at City broker Panmure Gordon, said: ‘The Bank has given two forecasts, neither of which are going to happen. I think rates will get to 4 per cent – it’s pretty much bang in the middle of the two.

‘I do have some sympathy with the Bank trying to produce forecasts.

‘But people are making mortgage decisions based on this guidance, and if it’s not the Bank’s best guess then they shouldn’t be giving it.’

The Bank of England’s policymaking has been complicated by Kwasi Kwarteng’s disastrous miniBudget in September during his short-lived time as Chancellor.

Mr Bailey said last night that Britain had been just ‘hours’ from economic meltdown when the Bank intervened to buy up Government bonds amid huge market turbulence following the mini-Budget.

Asked how close Britain came to financial meltdown, he told Channel 4 News: ‘At the point when we intervened I can tell you that the messages we were getting from the markets were that it was hours.’