Bank warns of recession and highest inflation in 40 years
PM says UK will ‘get through tough patch’ as cost of living crisis is forecast to worsen
THE Bank of England has warned that Britain is on the brink of a recession as the cost of living crisis sends inflation to a 40-year high.
Andrew Bailey, the Bank’s Governor, warned of a “very sharp slowdown” and said that sharply rising energy prices would inflict “hardship” on millions as interest rates were raised to 1 per cent, the highest since 2009.
In a bleak economic forecast as voters went to the polls for local elections, the Bank predicted that inflation would surge above 10 per cent later this year, its highest since 1981, while the economy will shrink in 2023 following a downturn beginning in the final three months of this year.
The Bank is predicting the secondlargest hit to disposable real incomes since records began in 1964, beaten only by 2011 as the global financial system was racked by crisis.
The pound suffered its biggest selloff since the onset of the Covid pandemic in March 2020 as traders fretted over the forecasts, falling as much as 2.2 per cent against the dollar to $1.23.
Mr Bailey issued the warning as the Conservative Party braced for heavy election losses amid calls for Boris Johnson and Rishi Sunak to do more to tackle the cost of living crisis. Mr Johnson has admitted the Treasury will have to do more for households, with further support expected to form a key part of the Prime Minister’s fightback.
On Tuesday, the Government will set out its agenda for the next parliamentary session in the Queen’s Speech, in an attempt to reset the narrative after weeks of negative headlines. Mr Johnson struck an optimistic note on the campaign trail before yesterday’s local elections, when he said Britain would “get through the tough patch” because of low levels of unemployment.
But Conservatives are concerned that voters’ lukewarm reaction to financial assistance in Mr Sunak’s Spring Statement has harmed the party at the polls, with faith in the Government likely to fall further as the crisis worsens.
Cabinet ministers urged the Chancellor to cut VAT and corporation tax.
“A recession feels inevitable – we may already be in one. What we’re hearing from retailers is horrifying – prices are going through the roof,” a minister told The Times. Another warned that “2024 will feel like 1974”.
The Bank said unemployment would climb from 3.8 per cent to 5.5 per cent in coming years, its highest since 2015, suggesting more than 450,000 extra people will find themselves out of work.
US markets also became volatile after the Federal Reserve increased rates to combat surging inflation on Wednesday evening. The Nasdaq index plunged by 5 per cent in its sharpest fall since 2020.
The Bank said energy bills would jump by another 40 per cent in October, on top of April’s 54 per cent increase, as the war in Ukraine forces up energy prices. Russia’s invasion has also driven up the cost of food and other commodities, while China’s zero Covid policy is causing chaos by shutting down major manufacturing centres.
Mr Bailey said: “I recognise the hardship this will cause for many people in the UK, particularly those on the lowest incomes, often with little or no savings, who are hit hardest by increases in the prices of basic necessities like food and energy. The economy has recently been subjected to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock.” The crisis will derail the recovery from Covid, forcing the economy to shrink in the final three months of the year, the Bank said.
GDP will be 0.25 per cent smaller next year than this year, forecasters predict, with an anaemic recovery dragging on into the middle of the decade as the country risks being mired in stagflation, where prices are rising but economic growth is limited.
Polling shows Labour is around six points ahead of the Tories, while two thirds of the public think Mr Johnson personally is doing a poor job.
The majority of voters (57 per cent) think that the economy is the most important political issue Britain faces.
Yesterday it was reported that some Tory backbenchers believe Mr Johnson could call a general election this year, in the hope of avoiding a worse perfor- mance at the polls in 2024 if the economy continues to struggle. But Oliver Dowden, the Conservative Party chairman, has told MPS there is “no way” an election could be held that early.
Mr Bailey and his colleagues on the Monetary Policy Committee (MPC) voted to raise interest rates from 0.75 per cent to 1 per cent, adding to the woes of the nation’s borrowers.
Banks including HSBC, TSB and Santander immediately increased the rates on variable rate mortgages to take advantage of the rise, adding £50 a month to the cost of a typical £250,000 loan.
It is the fourth consecutive rate rise at MPC meetings and takes rates to their highest since 2009, when the Bank slashed borrowing costs to combat the financial crisis. It also represents the first rate rise on an election day since 2004.
The Governor said this should ultimately help to make sure that inflation comes back down towards the 2 per cent target in the years to come, as there is a risk of higher energy and food prices spreading through the economy to create a longer-term problem.
Markets expect rates to reach 2.25 per cent by the end of the year in a further blow to borrowers.
A Treasury spokesman admitted the Government could not “shield everyone entirely” from the effects of the cost of living crisis. He added: “The UK is not alone in these challenges and while we can’t shield everyone entirely, we are taking action to ease pressures on households and drive growth. We’re continuing to focus on investment in people, capital and ideas to boost living standards in the longer term.”