Homeowners in the UK are set to face the biggest single shock on their mortgage bills since the 1980s as the Bank of England hiked interest rates for the eighth time in a row.
The Bank’s base rate will rise to 3 per cent from 2.25 per cent, its highest for 14 years, and decision makers warned that more hikes are likely.
It will help pile around £3,000 per year on to mortgage bills for those households that are set to renew their mortgages, the Bank said.
The Bank also warned that the UK could be on course for the longest recession since reliable records began in the 1920s.
Gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.
The economy has faced similarly long recessions in the past, but then the quarterly drops have been broken up with an occasional positive quarter.
However the Bank cautioned that this forecast is based on interest rates reaching as high as 5.2 per cent, which the Bank said it does not necessarily expect to happen.
It could be a drawn-out recession, but will be less than half as severe as the 2008 financial crisis, the Bank said.
From its highest to lowest point, GDP is expected to drop 2.9 per cent, the Bank said, compared with 6.3 per cent during the financial crisis.
Meanwhile unemployment is expected to peak at around 6.5 per cent, from 3.5 per cent today, slightly lower than in 2008.
There was better news in the Bank’s inflation projection.
It had previously forecast inflation to peak at 13 per cent in the third quarter of this year, but with the Government’s support on household energy bills the forecast was slashed to 10.9 per cent.
The Government has said that the energy support – which currently caps bills at 34p per unit of electricity and 10.3p per unit of gas – will be reviewed next April, instead of running for two years as previously promised.
Assuming that some support will remain in place for the full two years – albeit half as generous from April next year – the Bank forecast that inflation would drop to 5.25 per cent next year before dropping to 1.5 per cent in 2024.
The latest decision pushes interest rates to their highest since early December 2008, and will heap extra pressures on households.
It is the biggest single increase to the UK base rate since 1989 when the measure was still decided by the government.
Decision makers also said that more hikes were likely to come, however they do not expect rates to rise as high as the 5.2 per cent that the market has forecast for the final quarter of next year.
“The majority of the committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than prices into financial markets,” the Bank said on Thursday.
It also warned there are uncertainties and said that if inflation looks to be more persistent than the current outlook it will “respond forcefully”.