UK faces 'prolonged illness' as Bank says recession could continue into 2024

Everyone will be affected': Rising housing costs and rising inflation hit hard

Poverty campaigners have warned of a "prolonged period of suffering" after the Bank of England said Britain was facing its longest recession since records began, stretching well into 2024.

The bank raised interest rates by 0.75 percent to 3 percent on Thursday, leaving homeowners with the biggest single shock to their mortgage bills in more than three decades.

Money Saving Expert founder Martin Lewis says holders of variable rate mortgages face an additional £480 per year for every £100,000 of their loans.

And a further improvement implied by the Bank's economic outlook means that some 5 million households could pay an average of £3,900 more on their mortgage bills by the end of 2024, according to calculations by the Resolution Foundation think tank.

But the financial woes will extend far beyond homeowners, with tenants facing rising housing costs as landlords seek to cover their own mortgages, and the poor seeing the value of their incomes eroded by inflation at more than 10 percent. Chancellor Jeremy Hunt hinted that there was more pain to come in his November 17 fall statement, when he said there would be "difficult decisions" to be made both for tax hikes and public spending cuts.

Hunt has tried to blame Britain's poor financial position on events beyond the government's control, such as the Covid pandemic and the war in Ukraine. But Sir Keir Starmer said voters faced a "Tory premium on mortgages" as 12 years of austerity and sluggish growth had left the UK more exposed than other countries to global challenges.

"This, I'm afraid, lies at the door of Downing Street," said the Labor leader.

The TUC renewed its call for an immediate general election so that prime minister Rishi Sunak can seek a mandate for an austerity package that is expected to be issued later this month. And the CBI business organization issued a plea to Mr Hunt to "learn the lessons" of the early 2010s, when chancellor George Osborne undermined growth by hacking back the government's capital spending program.

The 75 basis point hike in the benchmark interest rate was the eighth consecutive increase by the World Bank's Monetary Policy Committee (MPC) from a historic low of 0.1 percent less than a year ago, and the biggest single jump in increase since 1989.

Bank Governor Andrew Bailey said that "the road ahead is going to be a tough one" as he set a forecast predicting the longest period of uninterrupted decline the nation has seen for about a century. The UK could face eight straight quarters of negative growth if current market expectations prove to be true, stretching through 2023 and into an expected election year of 2024, he said.

But Bailey has some hope for the homeowner, stating that he expects future gains to be lower than current rates by financial markets, meaning that rates on new fixed-term mortgages "do not need to rise as they have done". The Resolution Foundation, an organization focused on improving living standards, said that 1.2 million households with variable-rate mortgages can expect an increase in housing costs in the near term as a result of Thursday's hike. But they will join the 400,000 to 500,000 new households coming in from fixed rate deals every quarter, bringing the total facing higher monthly bills to around 5.1 million by the end of 2024.

Describing the rise as "historic in scale", the think tank's research director James Smith said: "The bank also made clear that the cost of living crises will be much deeper, and not just for those with mortgages. Everyone will be affected by double-digit inflation. prolonged period of time, but poorer households will be hardest hit by soaring food prices and energy bills.”

Figures released by the Bank suggest that the average household will see its real income fall by around £800 next year, once inflation is taken into account. Rebecca McDonald, chief economist at anti-poverty organization Joseph Rowntree Foundation, said the anxiety generated by the MPC statement made it "important" for Hunt to provide inflation-matched welfare increases in her Nov. 17 statement.

The hike, promised by Sunak when he became chancellor earlier this year, should be brought forward from April to provide instant relief, he said. Warning "an anxious winter followed by years of very thin for many low- or even middle-income people", Ms McDonald said the Bank's projections "show a prolonged period of pain with little relief". "It is very difficult for those on low incomes to plan how they will get through this, but the government can provide certainty by increasing the benefits according to inflation," he said.

At 0.75 percent, Thursday's rate hike was lower than the market had predicted to date, in line with lower-than-expected gains in other countries including Canada. The MPC split the seven votes in half on the incremental scale, with one member favoring a softer increase of 0.5 percentage point and the other favoring 0.25.

Mr Bailey acknowledged that the eight rate hikes since last December were "big changes, and they have had a real impact on people's lives". But he warned: "If we don't act decisively now, it will get worse later."

Mr Hunt said: “Inflation is the enemy and weighs heavily on families, retirees and businesses across the country. That is why this government's No. 1 priority is to contain inflation, and today the Bank has taken action in line with their goal of bringing inflation back to target.

"Interest rates are rising around the world as countries manage price hikes driven in large part by the Covid-19 pandemic and Putin's invasion of Ukraine." 

But Sir Keir told Times Radio: "There are other things going on in the world, but that's only part of the story. We are more exposed in this country – we pay a higher price in this country – because of the failures of the last 12 years.

“We have a weak foundation for our economy, we haven't had the growth we need, therefore we are more open. So it's not right if the government just says it's all external factors. This, I'm afraid, is at the Downing Street entrance."

TUC's chief economist, Kate Bell, said: “Workers are paying a high price for the Conservatives who are destroying the economy. We need a new economic plan with rising wages and strong public services at its heart. And we need elections now, to replace the party that created this crisis."

Liberal Democrat leader Sir Ed Davey described the World Bank's prediction of a recession as a "shame badge for Rishi Sunak and this Conservative government".

"Months of chaos and incompetence have damaged our economy, and people are suffering as a result," said Sir Ed. "It's time for proper windfall taxes for oil and gas companies, and for benefits and pensions to be increased according to inflation."

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