Bank Raises Rates And Warns Of 13% Inflation

Britain faces long recession and 13% inflation, warns Bank of England

- Larry Elliott, Phillip Inman, Heather Stewart

Vladimir Putin’s invasion of Ukraine has left Britain on course for a recession lasting more than a year and inflation above 13%, the Bank of England has warned as it raised interest rates for a sixth successive time.

Threadneedle Street said it had no choice but to increase borrowing costs by 0.5 percentage points to 1.75%, blaming Russia for cost of living pressures not seen in more than four decades and a 5% drop in living standards straddling this year and next – the biggest since records began in the 1960s.

Andrew Bailey, the Bank’s governor, said “there is an economic cost to the war”, as he predicted the economy was on course for a period of stagflation – a recession combined with a soaring cost of living.

While accepting the biggest increase in interest rates in 27 years would cause pain, particularly to the least well-off, Bailey said the Bank needed to act to prevent spiralling price rises becoming ingrained.

“If we don’t act now to prevent inflation becoming persistent, the consequences later will be worse, and will require larger increases in interest rates,” he said. “Returning inflation to its 2% target remains our absolute priority, no ifs, no buts.”

Hinting that further interest rate increases were likely, the Bank’s nine-strong monetary policy committee said it would be “particularly alert to indications of more persistent price pressures, and will if necessary act forcefully in response”.