Interest rates hit one per cent as concerns of recession grow

Interest rates hit one per cent yesterday, as Britain could be standing on the brink of another recession.

Inflation is set to peak at more than 10 per cent before the end of this year, the Bank of England warned yesterday, as the cost of living crisis will continue to squeeze households across the country.

Members of the Bank’s nine-strong Monetary Policy Committee voted 6-3 to increase rates from 0.75 per cent to 1 per cent – the fourth time in a row that they have voted for a rise – taking rates to a level not seen since 2009.

Grim forecasts predicted that growth will contract in the final quarter of this year, while Yorkshire MP and Shadow Chancellor Rachel Reeves said the figures show “how poorly” the Government are “managing our economy”.

Governor of the Bank of England Andrew Bailey

The Bank forecast “very weak” quarterly growth in 2023 and a contraction as a whole next year, with GDP falling by 0.25% and unemployment picking up sharply as cost pressures hit hard.

The Governor Andrew Bailey also warned of further “hardship” to come for families as disposable income will fall by an average of 1.75 per cent, and households will inevitably find themselves having to rein in spending.

He told reporters yesterday: “I recognise the hardship this will cause for many people in the UK, particularly those on the lowest incomes, often with little or no savings, who are hit hardest by increases in the prices of basic necessities like food and energy.”

Mr Bailey also called on firms to bear in mind the squeeze on low earners when setting their pay for top bosses in the coming weeks and months.

He said: “In the situation we are in, which is very difficult for low-income households and particularly difficult where inflation is concerned on things like energy and food… it’s important to bear that in mind when you are thinking about these things.”

Mr Bailey further cautioned: “The thing that concerns me is that in a competitive labour market… it’s those with the least bargaining power and those that are least well off who suffer the most in that process.

“It’s of great concern and it’s important that we do think about these effects,” he added.

Given the high rates of pay, it is likely that the salaries of executives at firms in Britain and abroad will come under scrutiny given the current economic climate. With the spectre of recession looming large, the pound fell sharply yesterday, down 0.8 per cent against the US dollar at 1.240 and 0.9 per cent lower against the euro at 1.174.

Leeds West MP Ms Reeves said the news will “seriously worry” families across the country.

In a statement yesterday, the Shadow Chancellor said: “Rising interest rates and further troubling growth downgrades underline not only how the Tories are failing to tackle the cost of living crisis, but also how poorly they’re managing our economy.

“This will seriously worry families across the country already dealing with soaring prices and bills.

“Not only are Ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with fifteen Tory tax rises that will further stifle our economic growth.

““They are out of ideas and out of touch,” she added.

Suren Thiru, head of economics, at the British Chambers of Commerce (BCC), said: “The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures many are facing.

“The Bank of England faces an unenviable trade-off between soaring inflation and a wilting economy.”