The Bank of England has unveiled its steepest interest rate rise in 33 years today, as it warns that the UK is set to endure the longest recession since the great depression.

The decision to raise rates by 0.75 percentage points to 3 per cent has returned the Bank’s interest rate to levels last reached during the 2008 financial crash. 

While this marks the Monetary Policy Committee’s eighth consecutive rate rise, it’s the first time in recent history it’s taken a plunge already made by US and European central banks, opting for a hefty 0.75-point hike. 

The hawkish Fed’s decision to impose its own 0.75-point increase yesterday for an unprecedented fourth time on the bounce piled pressure on BoE Governor Andrew Bailey to follow suit.

This increase in borrowing costs deals another blow to the millions of mortgage borrowers in Britain. 

For homeowners with a £200,000 mortgage, this latest hike will typically add £84 onto their monthly payments – just over £1,000 a year – at a time when the majority are already struggling with the soaring cost of living. 

The Bank has forecast that, if interest rates continue to rise, those whose mortgage deals are coming to an end could see their annual payments soar by £3,000.

It also means that house prices are set to fall further. 

A senior executive at Nationwide, one of the country’s biggest mortgage lenders, has suggested that house prices could drop as much as 30 per cent next year in the worst case scenario. 

It might feel tempting to welcome news of a drop in property prices. Sadly, it’s not that simple. House prices are falling because of reduced demand, and demand is only diminishing because fewer Brits can afford to put in offers given how much mortgages are going up. So, far from being an equaliser, the drop arguably only really benefits a small minority with enough cash to pay for a property up front. 

There’s a knock-on effect for renters too. About 40 per cent of landlords have a mortgage on their rental properties, and many will be passing on their increased mortgage costs in the form of inflated rent. 

Attempting to tame surging price growth without tanking the economy is a tough balancing act for the Bank. While Bailey and co are generally considered to have erred on the side of caution for fear of triggering a recession, critics believe they have been too slow to move on raising interest rates, resulting in runaway inflation of 10.1 per cent in September. 

Further interest rate rises are to be expected, though analysts are now predicting rates to peak next year at 4.75 per cent, as opposed to the previous forecast of 5.2 per cent. Inflation, meanwhile, is expected to peak at 11 per cent this winter before falling next year. 

In its outlook for the UK economy, released today, the Bank said that Britain already entered a downturn in the summer and this is likely to continue into the first half of 2024, during which time the unemployment rate will nearly double. Previously, the Bank had predicted that the UK wouldn’t fall into recession until the end of this year and that it would only last until the end of 2023.

Despite the gloomy revised forecast, there’s a couple of slightly more upbeat caveats: unemployment will be doubling from its historically low current rate. And, while the recession is forecast to drag on, it is predicted to be much shallower than the deep recession of the financial crash. 

Even so, criticism of the Bank’s move to normalise rates is mounting, with several economists fearing that higher rates will drive the economy into deeper recession than necessary. With higher taxes and cuts in public spending coming in the Autumn Statement, they argue that tightening monetary policy will exacerbate the downturn. 

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