The Bank of England has warned that the UK is in the midst of its longest recession since records began, as it raised interest rates to their highest level in 33 years.
It predicted a “very challenging” two-year slump in the UK, with unemployment nearly doubling by 2025.
Bank CEO Andrew Bailey warned of a “tough road ahead” for UK households, but said it needed to act quickly or things would “get worse later.”
It increased interest rates to 3% from 2.25%, the largest increase since 1989.
The Bank of England is raising interest rates in an attempt to bring down soaring prices as the cost of living rises at the fastest rate in 40 years.
Food and energy prices have risen, in part due to the Ukraine war, which has caused hardship for many households and has begun to weigh on the economy.
A recession occurs when a country’s economy contracts for two consecutive three-month periods – or quarters.
Companies typically make less money, wages fall, and unemployment rises. This means that the government receives less tax revenue to spend on public services like health and education.
The Bank had previously predicted that the UK would enter a recession at the end of this year, which would last until the end of next year.
However, it now believes that the economy has already entered a “challenging” downturn this summer, which will last through next year and into the first half of 2024, a possible general election year.
While it will not be the UK’s deepest recession, it will be the longest since records began in the 1920s, according to the Bank.
The unemployment rate is currently at its lowest in 50 years, but it is expected to rise to nearly 6.5% by the end of the year.
The announcement of interest rates is the first since former Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng released their divisive mini-Budget in September.
Their plans for £45 billion in unfunded tax cuts, much of which have since been reversed, sent the pound plummeting and causing market turmoil, forcing the Bank of England to intervene to restore calm.
Mr Bailey told the BBC that he believed the mini-budget had “harmed” the UK’s international standing.
He stated that during a recent International Monetary Fund meeting in Washington, “it was very clear to me that the UK’s position and standing had been harmed.”
Mr Kwarteng was fired as Chancellor the following week.