The Bank of England has warned that households are facing the worst strain on their disposable income in at least 30 years, with inflation rising to 7.5 percent, economic growth slowing, unemployment rising and taxes rising.
Exposing a dark picture of the economy, the BoE Monetary Policy Committee raised interest rates by a quarter to 0.5%, the first tightening of monetary policy in successive meetings since 2004.
The European Central Bank has also expressed concerns about inflationary pressures. Its president, Christine Lagarde, declined to rule out an increase in interest rates this year, citing what she said was a “unanimous concern” about inflation.
In the UK, income contractions will hit hardest in April, when the typical annual gas and electricity bill rose 54 percent to almost £ 2,000 from £ 1,277 today.
Chancellor Rishi Sunak, who announced a £ 9bn bailout package to hold the bills, told a Downing Street news conference that “energy markets predict prices will rise as early as October”.
Analysts had expected the ceiling on energy prices to rise to £ 2,450 per household in October. But Sunak said the support he announced was intended to continue “throughout the year”. He said markets expect prices to fall “quite significantly” by next spring.
BoE Governor Andrew Bailey said the blow to household incomes was not serious enough to reduce inflation. Passing on what he said was a “difficult message” about the cost of the loan, he acknowledged that the rise in interest rates “will be felt by households and businesses in the UK”.
With the increase in national insurance and income tax, which also comes in April, BoE officials estimated that the real value of post-tax earnings will fall by 2 percent in 2022, the strongest contraction for any full year since the beginning of the year. equivalent records in 1990
Bailey called on employees not to respond by seeking higher wages, as rising prices will become entrenched in the economy and lead to a “longer period of high inflation”.
The Bank of England also cut its 2022 growth forecast from 5% to 3.75%, before setting a “slow” rate of just 1% in the medium term.
Unemployment is projected to rise from the low of 3.8% to 5% as the economy struggles to get rid of its inflationary trends.
Financial markets expect interest rates to rise faster and further, with traders pricing the increase in official interest rates to at least 1% by May and 1.5% by November.
To alleviate the pain, Sunak has revealed a £ 9 billion package support for households with a £ 200 discount on energy bills for all households coming in the autumn but paid over the next five years.
Those with properties in municipal tax groups A to D will also have a £ 150 reduction in their accounts this year. The chancellor said it was a “fair, focused and proportionate” package of support.
But lawmakers and opposition activists said the support would do little to offset the combined increases in energy and national insurance, which would leave £ 1,300 out of the pocket of typical households. Labor called universal energy discounts a “buy now, pay later” scheme.