Bank predicts prolonged recession and £800 hit to incomes next year as it scales back interest rate expectations

The Bank of England has forecast a prolonged recession and a deep income squeeze next year, as it scaled back expectations of future interest rate rises despite raising interest rates by 75 basis points to 3 per cent today (Thursday), the Resolution Foundation said.

The Monetary Policy Committee voted to raise Bank Rate by 75 basis points – the biggest single increase 1989 – to 3 per cent (the highest since November 2008) but signalled clearly that financial markets had overestimated the amount that rates are going to rise to.

The Foundation notes that around 1.2 million households on variable rate mortgages will see their housing costs increase in the near future, with between 400,000 and 500,000 new households affected every quarter as they roll onto new fixed-term deals.

By the end of 2024, 5.1 million households will have seen their mortgage costs increase substantially, with an average annual increase of £3,900 relative to Autumn 2023 (based on the interest rate expectations derived from the Bank’s economic outlook).

The Bank’s updated economic outlook makes for sobering reading, with the economy set for the longest recorded recession, contracting throughout 2023 and into 2024, and on track to be smaller at the end of the current parliament than it was at the start.

The Government’s Energy Price Guarantee means that the inflation forecast is, however, lower than it was in August, with inflation set to peak at 10.9 per cent in October before falling back through next year.

The Bank also expects consumer food and non-alcoholic beverages price inflation to rise further and stay above 15 per cent for at least six months (when their forecast ends).

The combination of food and energy bill-driven inflation means that price pressures will be most acute for lower income households as they spend more of their budgets on these items, says the Foundation.

The Bank’s latest forecast for Real Household Disposable Income (RHDI) illustrates the scale of deepening cost-of-living crisis, as it implies that the average household will see their real incomes fall by around £800 next year.

James Smith, Research Director at the Resolution Foundation, said:

“Today’s interest rate rise was both expected and historic in terms of its sheer scale. Despite the Bank clearly signalling that rates will not go as high as financial markets have been expecting, further rate rises are still coming, with over five million households set to see their monthly mortgage bills increase sharply over the next two years, by an average of around £3,900.

“The Bank also made clear that the cost-of-living crisis is set to get far deeper, and not just for those with a mortgage. Everyone will be affected by prolonged double-digit inflation, but poorer households will be hit hardest by the surge in food prices and energy bills.

“This provides a sobering backdrop for the Autumn Statement, where the Government will need to both calm the markets, while also protecting households from the worst of the cost-of-living storm.”