LONDON: Britain will sink into a lengthy recession later this year as inflation rockets even higher, the Bank of England forecast on Thursday as it unveiled the biggest interest rate hike since 1995.

The move comes as Britons endure a cost-of-living crisis that has dominated the race to succeed Boris Johnson following his resignation as prime minister.

The BoE’s Monetary Policy Committee voted 8-1 to lift its key rate by 0.50 percentage points to 1.75 percent, it said in a statement.

Most policymakers felt that a “more forceful policy action was justified” than in previous meetings to combat rampant inflation fuelled by rocketing domestic energy bills.

Forecasts recession as inflation soars

The BoE is the latest central bank to ramp up its rates as countries around the world battle decades-high consumer prices that have soared since Russia invaded Ukraine in February.

“I have huge sympathy for those who are struggling and are asking why we’re making it even harder,” bank governor Andrew Bailey said at a news conference.

“All I can say is the alternative is worse,” he said.

‘Winter is coming’

UK inflation was predicted to peak this year at just over 13 percent, reaching the highest level since 1980. The BoE’s chief task is to keep inflation close to a target of 2pc.

The bank said wholesale gas prices have nearly doubled since May due to Russia restricting supplies to Europe, warning that this will “exacerbate” the fall in real incomes and further increase inflation in the near term.

The bank now anticipates the UK economy will enter a painful recession in the fourth quarter that will last until late 2023.

The UK economy is expected to shrink by up to 2.1pc in size from its highest point, according to the forecast.

“Winter is coming, and it’s shaping up to be an absolute horror show for the UK economy,” said Laith Khalaf, analyst at AJ Bell, an investment platform.

Published in Dawn, August 5th, 2022