The Bank of England (BoE) has predicted a recession that will last for longer than a year with CPI inflation set to peak at 13% later this year.
The warning comes as the BoE cuts its growth forecasts, expecting the economy to fall into recession from the October-December quarter.
It said a typical energy bill will rise to £3,500 in October, three times what it forecast a year ago.
The central bank said it expects the recession to last until the end of 2023. It expects output to fall by 2.1% from peak-to-trough during this recession, similar to the 1990s recession, and smaller than after the 2008 crash.
The warning comes as the BoE hiked interest rates by 0.5% to 1.75% with the Monetary Policy Committee (MPC) voting 8-1 in favour of the rise.
The MPC has been increasing the cost of borrowing since December as it tried to curb high inflation, made worse by the Russian invasion of Ukraine, which has sent the cost of gas rising to record highs.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “We need to brace for tough times ahead as the Bank of England predicts a recession on the horizon at a time when people are already under severe financial pressure from soaring bills.
“Interest rates have increased for the sixth successive time as the Bank of England battles to tame soaring inflation. This month’s increase is the largest in over a quarter of a century.
“It’s a global phenomenon with the BoE following the Fed and ECB in going above and beyond 0.25% increases as inflation proves incredibly stubborn. The Bank of England now expects inflation to peak at 13% in the second quarter of 2022 and that it will remain elevated through much of 2023. This is largely down to a near doubling of the wholesale gas price since May which feeds through to higher prices for consumers.
“Recession predictions pile on the pressure even further with the potential for job losses causing further concern for people already struggling to pay their bills.
“The interest rate increase has big impacts for our finances. Mortgage holders who are yet to fix their rates as well as those trying to repay other debt who will see their repayments climb. However, savers and people coming up to retirement may be able to find some slightly more positive news among the gloom.”
