The Bank of England has warned that the UK is heading for a recession in the wake of the 0.5% base rate rise.
The recession should last from October until the end of next year, over which time the UK’s output should fall by 2.1%.
The Bank calculated that, even with a package of financial stimulus, people’s post-tax disposable income will fall by 1.5% this year and 2.25% next year.
This would be the first time there has been consecutive falls since the 1960s.
Andrew Bailey, its governor, said “there is an economic cost to the war” between Russia and Ukraine, adding the Bank had little choice but to opt for a steeper interest rate rise.
He added: “If we don’t act now to prevent inflation becoming persistent, the consequences later will be worse, and will require larger increases in interest rates.
“Returning inflation to its 2% target remains our absolute priority, no ifs, no buts.”
As it stands the Bank expects inflation to peak at 13%.
The average household bill is now expected to rise to £3,500 by October, up from the £2,800 prediction the Bank made in May.
Only a year ago the Bank expected the headline rate of inflation to peak at 4%, showing how the landscape has seemingly been changed by the Russia-Ukraine war.
Bailey in trouble?
Liz Truss’s backers have since attacked the Bank of England for being too slow to increase interest rates.
Suella Braverman, a Truss ally tipped as a future home secretary, told Sky News: “Interest rates should have been raised a long time ago and the Bank of England has been too slow in this regard.”
She later questioned whether the Bank could be trusted to independently manage interest rates.
Bailey has come under scrutiny in his role as Govenor, which he has held for two years, as The Guardian ran an article asking “Is his job safe?”
While Bailey’s predecessor Mark Carney was often derided for his vague “forward guidance” policy, Bailey has been accused by investors of failing to lay out the framework for decision-making.
He is also attracting controversy for telling workers to refrain from asking for a pay rise to help bring down inflation.
Bailey told BBC Radio 4’s Today programme: “If everybody tries to beat inflation – and that is in both price-setting and wage-setting – it doesn’t come down, it gets worse.
“My key point is, if inflation becomes embedded and persistent, it gets worse. And the effects get worse.”