The Bank made its forecasts as its Monetary Policy Committee voted 8-1 for a half point rise in its base rate that lifts the cost of borrowing to 1.75 per cent.
The report accompaning today’s decision said the slump will begin in the fourth quarter of this year and will continue until the end of 2023.
GDP will fall by 2.1 per cent over the period putting the downturn on a par with the early Nineties recession.
A recession is defined as two consecutive quarters of negative growth. It will be the third recession of the century, following the slumps triggered by the global financial crisis and the covid pandemic.
The Bank also warned that inflation will peak at 13.3 per cent in the fourth quarter, higher than its previous estimate of 11 per cent. Living standards will fall by 5%.
The grim forecasts shocked City commentator.s Laith Khalaf, head of investment analysis at brokers AJ Bell, said: “Winter is coming, and it’s shaping up to be an absolute horror show for the UK economy. Make no mistake, 0.5% is a historic interest rate rise, but it is overshadowed by the abysmal economic forecasts produced by the Bank of England. Inflation is now forecast to hit 13% at the back end of this year, when the UK is also expected to enter into recession, just in time for Christmas. Inflation is then expected to remain elevated into next year, and still be over 9% in the third quarter of 2023
Chancellor Nadhim Zahawi said:”Along with many other countries the UK is facing global economic challenges and I know that these forecasts will be concerning for many people.” He said the Government was providing a £37 billion package of help for households.
GDP is thought to have fallen 0.2 per cent in the second quarter of the year and expected to rebound by 0.4 per cent in the third quarter - partly because of the timing of the Queen’s Platinum Jubilee - before sinking again in the Autumn quarter.
Janet Mui, head of market analysis at wealth manager Brewin Dolphin, said “Although interest rates are still low compared to the rate of inflation and relative to history, the speed and extent of the increase will act as a dampener for confidence and hence growth. The most direct impact to households will be the higher cost of refinancing for mortgages, which often is the biggest monthly outgoing.
“While over 80% of UK mortgages are on some sort of fixed term, those who come to refinance will be in for a shock as 2-year and 5-year mortgage rates have more than doubled since the end of last year, and well above the levels at any point in the previous 2-5 years.
“With the forthcoming jumbo increases in energy bills and further tightening in financial conditions for some households and corporates, the cost of living crisis will be a burning policy issue for the contenders of the next Prime Minister.”
Chris Beauchamp, chief market analyst at trading platform IG Group, said: “The BoE’s biggest hike in almost three decades has done little to bolster the pound, given the gloomy forecasts that come with it. Having spent months trying to raise rates cautiously in order to avoid triggering a recession, it now expects one anyway, with further declines in real income. Set against a US economy that seems to be weathering rate hikes reasonably well, there seems little reason to chase the rally in sterling here.”