The Bank of England has warned of the longest recession since the financial crisis as it hikes interest rates by 0.5 points, the sharpest rise since 1995.

The Bank expects the British economy to shrink in the final quarter of this year and keep shrinking until the end of 2023, for a total of five quarters of negative growth. GDP is expected to fall by as much as 2.1 per cent. The pound fell 0.4 per cent on the news.

At the same time, inflation is predicted to peak at 13.3 per cent in October. We’re well and truly in stagflation territory – poor growth and high prices – which is notoriously tricky to escape.

There is a small upside. While the sharp hike suggests the Bank is (belatedly) tilting its scales to prioritise tackling inflation over maintaining growth, expectations of future interest rate hikes are falling. Markets have already pared back expectations for peak Bank Rate from 3.5 per cent in June to 2.9 per cent.

It’s not much, but it’s something, not least for the roughly two million variable rate mortgage holders. Today’s increase means the average tracker mortgage customer is paying £171.47 more per month than in December, when rates started creeping up, according to UK Finance, the trade body.

The Bank’s dire forecast comes a day after the National Institute for Economic and Social Research (NIESR) warned that soaring bills risk eliminating personal savings. NIESR said that around 5.3m households – one in five – will have no savings at all by 2024, twice the current level.

The Resolution Foundation also published analysis forecasting inflation to climb as high as 15 per cent, the highest level since 1980.  

It all makes for grim reading. Yet a few silver linings suggest fears of a return to the dark days of the 1970s are overblown.

For instance, the S&P Global/CIPS construction purchasing mangers’ index (PMI) – which tracks activity in the construction sector – dipped below 50 in July, but only after posting an impressive 17 consecutive months over 50, which indicates growth.

And as Alex Brummer notes in the Mail, high street banks tend to be the canary in the coal mine, acting as a prior warning of poor health in the wider economy. Yet banks are optimistic. Bosses are not seeing the signs of stress from customers you might expect in a cost-of-living crisis, like dangerous build-ups of borrowing. Charlie Nunn, chief executive of Lloyds, said last month that all the negative press coverage meant we were in danger of talking ourselves into recession.

Still, hopes of relief for already hard-up families are only going in one direction. Households are set to be pummelled as the energy price cap rises in October, with the average energy bill hitting nearly £300 a month.

To make matters worse, Ofgem will now review the cap every three months rather than ever six, meaning price rises will be passed onto consumers more quickly. The Bank of England’s grim predictions point to things getting quite a bit worse before they get better.