The Bank of England has warned that the UK is heading towards its longest-ever recession, as it increased its base interest rate by 0.75% to a 14-year high of 3%.
The Bank forecasts that the UK, which already entered a recession in the third quarter of this year, is facing eight consecutive quarters — or two years — of negative growth (a recession is defined as two consecutive quarters of negative growth).
It also predicted that inflation would increase by 0.9% to peak at 11% by the end of this year. Unemployment will continue to rise until 2025, potentially reaching 6.4% — almost 3% more than the current rate.
A 'tough road ahead'
In an official press release, the Bank described the UK's economic outlook as "very challenging", noting that Britain is "expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term".
However, the Bank also noted "considerable uncertainties around the outlook" and emphasised that "if the outlook suggests more persistent inflationary measures, it will respond forcefully." In practice, this could mean even greater interest rate hikes in the near future.
In a press conference announcing this latest interest rate hike, Bank of England Governor Andrew Bailey admitted that "the road ahead will be a tough one" but that the Bank's interest rate rise (its eighth since last December) was necessary.
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"If we do not act forcefully now, it would be worse later on," Bailey said.
Echoing Bailey's remarks, Chancellor Jeremy Hunt said that the UK had "no easy options", and stressed the need to "take difficult decisions on tax and spending" in order to "restore stability" to the British economy.