The Bank of England has unveiled the UK’s biggest interest rate rise since the 1980s in a bid to curb runaway inflation.
Financial chiefs said the UK could be in line to experience the longest recession since records began after announcing the decision to raise the base rate from 2.25% to 3% – the highest level since 2008.
The 0.75-point increase is the largest since 1989 and marks the eighth straight rise since last year when it was just 0.1%.
The economy could fall into eight consecutive quarters of negative growth if current market expectations prove correct, experts said.
It would be the longest period of uninterrupted decline that the nation has experienced for around a century, but would be a milder recession than in previous times.
Chancellor Jeremy Hunt said spiking rates of inflation were “being driven by Covid-19 and Russia’s invasion of Ukraine”.
But opponents called on Prime Minister Rishi Sunak “face up to his mistakes” that have led to the “vicious cycle of stagnation”.
From its highest to lowest point, gross domestic product (GDP) is expected to drop 2.9%, a much smaller decrease than the 6.3% drop seen during the 2008 financial crisis.
The Bank also predicted inflation would peak at around 11% at the end of this year, while the unemployment rate could hit 6.4% by the end of 2025.
The increase means means a £73.49 monthly rise for the average tracker mortgage, and £46.22 for the average standard variable rate (SVR) mortgage.
The pound fell after the Bank of England’s aggressive rate rise and warnings over a prolonged recession lasting two years.
Sterling dropped 1.4% to 1.123 against the US dollar and was 0.8% lower at 1.15 euros.
“The majority of the committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than prices into financial markets,” the Bank said.
Shadow chancellor Rachel Reeves accused the Conservatives of “weakening the foundations” of the UK economy.
“Families now face higher mortgages and more anxiety after months of economic chaos,” the Labour MP said.
“As Chancellor and now Prime Minister, Sunak must face up to his mistakes that have led to the vicious cycle of stagnation this Tory government has trapped us in.
“Working people are paying the price for Tory failure. Britain deserves more than this.”