Bank of England warns UK will fall into recession this year as interest rates soar

The BoE predicted the UK economy would shrink in the final three months of 2022 and would continue shrinking until at least the end of 2023 – the longest recession since the 2008 financial crisis. 

It made the prediction on the same day it increased interest rates from 1.25% to 1.75% – their highest point since 1995 – in a bid to curb soaring inflation. 

The BoE blamed the increase on Russia’s invasion of Ukraine, which has pushed the cost of energy to three times what it was last year, in turn driving overall inflation.

Inflation is set to peak at 13% at some point later this year – a 42-year high. 

Alongside energy prices, UK households have also been stung by increasing costs for petrol and diesel as well as food inflation. This has had a deleterious effect on consumer confidence, which hit record lows in July. 

BoE governor Andrew Bailey warned the impact of the cost-of-living crisis would be disproportionately felt by the poorest households. 

“It will get worse precisely, I’m afraid, for those who are least well-off in society,” he said.

“So, while I have huge sympathy and huge understanding for those who are struggling most with this – and I know that they will feel: ‘Well, why have you raised interest rates today? Doesn’t that make it worse from that perspective in terms of consumption?’ – I’m afraid my answer to that is: it doesn’t because I’m afraid the alternative is even worse in terms of persistent inflation.”