Bank of England hikes interest rates to 3% in biggest rise since 1989

Bank fears rise may push UK economy into longer and deeper recession than the 1930s

The Bank expects inflation, which hit 10.1% in September, to peak at 11% by the end of 2022.

The Bank of England has increased the cost of borrowing by 0.75 percentage points to 3%, despite predicting that higher interest rates would push the economy into the longest recession since the 1930s.

In a split vote, the central bank’s monetary policy committee (MPC) voted by a 7-2 majority for the biggest increase in rates since 1989 to combat an inflation rate that hit 10.1% in September.

The Bank blamed higher energy prices and a tight labour market for the decision to increase interest rates, matching rises in the last week by the US Federal Reserve and the European Central Bank.

The last time rates increased by more than 0.5% was in 1989. The Major government was forced into a 2% hike during the Exchange Rate Mechanism crisis in 1992, though for less than 24 hours before it was scrapped.

Without taking into account the chancellor Jeremy Hunt’s likely squeeze on government spending in his budget on 17 November, which could worsen the outlook for economic growth, the MPC said the economy was already contracting and would continue to shrink for eight consecutive quarters to the summer of 2024 if interest rates continue to rise as financial markets expect.

The Bank expects inflation, which hit 10.1% in September, to peak at 11% by the end of 2022.

The severity and length of the recession is expected to crush consumer spending and hit business confidence, leading to a two-year recession that will be longer, if not deeper, than the slump in the 1930s.

Conservative MPs are likely to be concerned at the forecast, which shows the economy only just reviving before a general election expected in the second half of 2024 and the economy growing only modestly in 2025.

Inflation has taken off in most developed countries as the war in Ukraine reduced the supply of gas and sent world prices of essential resources soaring.

Britain has been hard hit by a combination of high energy prices and a lack of workers in several key industries, leading to concerns of spiralling wages.

The Bank of England has ramped up its rate rises in recent months as the impact on gas and other commodity prices from the war intensified.

Guardian Service