London Daily

Focus on the big picture.
Friday, Jul 04, 2025

UK economy to be in recession for more than a year, Bank of England warns as it hikes rates

UK economy to be in recession for more than a year, Bank of England warns as it hikes rates

The Bank of England pushes interest rates up by half a percentage point - the sixth rise since December and the biggest rise since 1995.

The UK economy will be plunged into recession for more than a year this autumn as rising energy prices push inflation above 13%, the Bank of England has warned.

In a bleak outlook for consumers and business, the bank forecast five quarters of economic contraction and a 5% fall in real-terms living standards, and increased interest rates by 0.5 percentage points, the largest single rise in 27 years.

The bank's baseline forecast is for GDP to fall by 1.25% in 2023 and 0.25% in 2024, the first instance of two years of annual economic contraction since the 1960s.

The bank's Monetary Policy Committee voted 8-1 to increase the base rate to 1.75%, an attempt to prevent the inflationary impact of soaring energy prices being compounded by domestic price and wage pressures.

The interest rate increase will add around £650 to annual repayments for those with an average tracker mortgage. The increase in monthly tracker repayments for homeowners since rates began rising from a low of 0.1% last December is around £170.

The savage inflation rate, the highest since September 1980, is being driven by the rising cost of wholesale gas on international markets, which has doubled since May and is on course to treble domestic energy bills.

The bank believes that the domestic energy price cap will reach £3,500 per household in October, prompting inflation to peak at 13.3% in the fourth quarter of this year and remain above 10% until the middle of next year. It's forecast to fall back marginally to 9.5% in the third quarter and 5.5% by the end of the 2023.

The domestic energy price cap is expected to increase again when regulator Ofgem reviews the figure in January, but the MPC believes the inflationary impact will be offset by falls in other areas. It says goods price inflation may have peaked, and commodity prices are already beginning to fall back.



Real living standards to fall, despite support for energy costs


Real living standards, even after the impact of direct government support for energy bills of at least £400 per-bill payer, are forecast to fall by 1.5% this year and 2.25% next year, with a 5% decline from peak to trough.

A five-quarter recession ending in the first quarter of 2024 would be comparable in length to the downturns of 2007-08, the early 1990s and the early 1980s, but would be shallower than the financial crisis with a peak-to-trough decline in GDP of 2.1%.

The bank's Monetary Policy Committee said energy prices are responsible for the majority of the rise in inflation, with continued COVID supply chain disruption the other significant factor.

Wages to rise but recession could result in higher unemployment


The tight domestic labour market, which currently features more vacancies than job-seeking unemployed, is also a factor.

The MPC forecast that wages will rise 6% this year as employers battle to recruit and retain staff, but warned that as the recession bites unemployment could begin to rise next year from the current 3.8%, peaking at 5.5%.

Explaining its reasoning for the rate increase, the minutes of an MPC meeting said: "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 turns negative.

"The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.

"In view of these considerations, the committee voted to increase the Bank Rate by 0.5 percentage points, to 1.75%."

Chancellor of the Exchequer, 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.

"Addressing the cost of living is a top priority and we have been taking action to support people through these tough times with our £37bn package of help for households, which includes direct payments of £1,200 to the most vulnerable families and a £400 discount on energy bills for everyone.

"We are also taking important steps to get inflation under control through strong, independent monetary policy, responsible tax and spending decisions, and reforms to boost our productivity and growth. The economy recovered strongly from the pandemic, with the fastest growth in the G7 last year, and I'm confident that the action we are taking means we can also overcome these global challenges."

'Proof the Tories have lost control of the economy'


Rachel Reeves, shadow chancellor, said the forecast was "further proof that the Conservatives have lost control of the economy".

"As families and pensioners worry about how they're going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis.

"Labour would help households right now by removing the tax breaks that are subsidising oil and gas producers and using that money to help people now, including by cutting VAT on energy bills.

"And with our Climate Investment Pledge and plan to buy, make and sell more in Britain, a Labour government will build the strong, secure and fair economy we need."

Newsletter

Related Articles

0:00
0:00
Close
DJI Launches Heavy-Duty Coaxial Quadcopter with 80 kg Lift Capacity
U.S. Senate Approves Major Legislation Dubbed the 'Big Beautiful Bill'
Largest Healthcare Fraud Takedown in U.S. History Announced by DOJ
Poland Implements Border Checks Amid Growing Migration Tensions
Political Dispute Escalates Between Trump and Musk
Emirates Airline Expands Market Share with New $20 Million Campaign
Amazon Reaches Milestone with Deployment of One Millionth Robot
US Senate Votes to Remove AI Regulation Moratorium from Domestic Policy Bill
Yulia Putintseva Calls for Spectator Ejection at Wimbledon Over Safety Concerns
Jury Deliberations in Diddy Trial Yield Partial Verdict in Serious Criminal Charges
House Oversight Committee Subpoenas Former Jill Biden Aide Amid Investigation into Alleged Concealment of President Biden's Cognitive Health
King Charles Plans Significant Role for Prince Harry in Coronation
Two Chinese Nationals Arrested for Espionage Activities Against U.S. Navy
Amazon Reaches Major Automation Milestone with Over One Million Robots
Extreme Heat Wave Sweeps Across Europe, Hitting Record Temperatures
Meta Announces Formation of Ambitious AI Unit, Meta Superintelligence Labs
Robots Compete in Football Tournament in China Amid Injuries
Trump Administration Considers Withdrawal of Funding for Hospitals Providing Gender Treatment to Minors
Texas Enacts Law Allowing Gold and Silver Transactions
China Unveils Miniature Insect-Like Surveillance Drone
OpenAI Secures Multimillion-Dollar AI Contracts with Pentagon, India, and Grab
Marc Marquez Claims Victory at Dutch Grand Prix Amidst Family Misfortune
Germany Votes to Suspend Family Reunification for Asylum Seekers
Elon Musk Critiques Senate Budget Proposal Over Job Losses and Strategic Risks
Los Angeles Riots ended with Federal Investigations into Funding
Budapest Pride Parade Draws 200,000 Participants Amid Government Ban
Southern Europe Experiences Extreme Heat
Xiaomi's YU7 SUV Launch Garners Record Pre-Orders Amid Market Challenges
Jeff Bezos and Lauren Sanchez's Lavish Wedding in Venice
Russia Launches Largest Air Assault on Ukraine Since Invasion
Education Secretary Announces Overhaul of Complaints System Amid Rising Parental Grievances
Massive Anti-Government Protests Erupt in Belgrade
Trump Ends Trade Talks with Canada Over Digital Services Tax
UK Government Softens Welfare Reform Plans Amid Labour Party Rebellion
Labour Faces Rebellion Over Disability Benefit Reforms Ahead of Key Vote
Jeff Bezos and Lauren Sánchez Host Lavish Wedding in Venice Amid Protests
Trump Asserts Readiness for Further Strikes on Iran Amid Nuclear Tensions
North Korea to Open New Beach Resort to Boost Tourism Economy
UK Labour Party Faces Internal Tensions Over Welfare Reforms
Andrew Cuomo Hints at Potential November Comeback Amid Democratic Primary Results
Curtis Sliwa Champions His Vision for New York City Amid Rising Crime Concerns
Federal Reserve Proposes Changes to Capital Rule Affecting Major Banks
EU TO HUNGARY: LET THEM PRIDE OR PREP FOR SHADE. ORBÁN TO EU: STAY IN YOUR LANE AND FIX YOUR OWN MESS.
Trump Escalates Criticism of Media Over Iran Strike Coverage
Trump Announces Upcoming US-Iran Meeting Amid Controversial Airstrikes
Trump Moves to Reshape Middle East Following Israel-Iran Conflict
Big Four Accounting Firms Fined in Exam Cheating Scandal
NATO Members Agree to 5% Defense Spending Target by 2035
Australia's Star Casino Secures $195 Million Rescue Package Amid Challenges
UK to Enhance Nuclear Capabilities with Acquisition of F-35A Fighter Jets
×