Britain heading for year-long recession, Bank of England predicts

Bank announced a further hefty hike in official interest rates of a half a percentage point, as it fights an epic battle to get British inflation under control

Bank of England predicted inflation would stay elevated and the economic downturn would extend through next year and 2024.

Britain is hurtling towards a recession that will last for more than a year, as inflation spikes to 13% and hard-hit households face the sharpest fall in their spending power in about 60 years, the Bank of England has forecast in its bleakest prediction for the UK economy in over a decade.

Fears the British economy was heading into some sort of major contraction due to its severe cost-of-living crisis had been widely flagged. But the latest assessment by the Bank of England on Thursday was if anything much bleaker than anticipated, economists said. 

It comes as the Bank of England also announced a further hefty hike in official interest rates of a half a percentage point, as it fights an epic battle to get British inflation under control. With more rates hikes likely on the way, the British economy is facing a series of further shocks. 

Warning the economic clouds are darkening, the Bank of England predicted inflation would stay elevated and the economic downturn would extend through next year and 2024. The outlook is based on average energy bills increasing by 75% to about £3,500 (€4,150) in October. 

Based on interest rates peaking at 3% next year, British consumer price inflation will spike to 13% this year, fall to 5.5% in 2023, and only drop below its mandated 2% inflation target in 2024, the bank has forecast. 

After growing 3.5% this year, British GDP will drop by 1.5% in 2023 and contract by a further 0.25% in 2024. 

And unemployment, which is running at 3.75% this year, will rise over the next two years to reach 6.3% by late 2025, it said. 

The Bank of England signalled out the huge surge in gas prices since the February 24 invasion of Ukraine by Russia for driving wholesale energy prices and consumer price inflation higher. 

 "GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe," the bank said in its Monetary Policy Report published on Thursday. 

"The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative," it starkly warned. 

But it has also forecast that oil and gas prices will stay at elevated levels for years to come. The assumptions underpinning its forecasts include the price of wholesale gas remaining at current elevated levels and the price of global crude oil trading at $93 a barrel through 2024. 

"The economy has continued to be subject to a succession of very large shocks, which will inevitably lead to volatility in output. Monetary policy will ensure that, as the adjustment to these shocks occurs, CPI inflation will return to the 2% target sustainably in the medium term," the bank pledged on Thursday.      

The Bank of England also sees sterling's effective exchange rate index, or ERI, eroding further by 2024.        

"The sterling effective exchange rate has depreciated by 3% since the May report," the bank said. 

Bank of England governor Andrew Bailey said sterling's decline was “not a crisis” for now and that policy makers were watching it along with many other measures to assess the economic outlook. 

The British currency has fallen more than 10% against the dollar so far this year, adding to the cost of imports and things priced the US currency, like oil. 

Mr Bailey said that for now, officials don’t see the drop as a major problem. “We don’t target the exchange rate,” Mr Bailey said in an interview on Bloomberg Television.