Business

UK interest rates jump amid warnings of ' longest recession since records began'

Bank of England governor Andrew Bailey
Bank of England governor Andrew Bailey Bank of England governor Andrew Bailey

The UK could be on course for its longest recession since reliable records began a century ago, the Bank of England has warned.

It came as policy-setters raised interest rates to 3 per cent from 2.25 per cent, marking the biggest single increase since 1989.

And the Bank has said further interest rate hikes could be required to tame runaway inflation.

All but two members of the Monetary Policy Committee (MPC) voted to push up interest rates by 0.75 percentage points during a crunch meeting on Thursday.

One member of the nine-person MPC voted for a 0.5 percentage point increase, while another wanted a much softer 0.25 percentage point rise.

But while further hikes could be necessary to pull inflation back to its 2 per cent target, the peak rate will be lower than what financial markets currently expect, the Bank said.

The move by the Bank means it is the eighth consecutive monthly increase in interest rates.

The Bank warned that the economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct. It would be the longest period of uninterrupted decline that the nation has experienced for around a century.

However, it would be a milder recession than in previous times.

From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9 per cent, a much smaller decrease than the 6.3 per cent drop seen during the 2008 financial crisis.

The Bank also predicted inflation would peak at around 11 per cent at the end of this year, while the unemployment rate could hit 6.4 per cent by the end of 2025.

The 0.75 percentage points increase to 3 per cent means a £73.49 monthly rise for the average tracker mortgage, and £46.22 for the average standard variable rate (SVR) mortgage.

The pound fell after the Bank of England’s aggressive rate rise and warnings over a prolonged recession lasting two years.

Sterling dropped 1.4 per cent to 1.123 against the US dollar and was 0.8 per cent lower at 1.15 euros.