Hard-pressed households have been hit with a record interest rate hike to 1.75% as the Bank of England warned of a year-long recession to hit this winter.
Today has been dubbed Black Thursday as Britons are hit with a triple whammy of rates, inflation and energy bills.
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Families today face a Black Thursday of financial misery with a triple whammy of rising interest rates, soaring energy bills and runaway inflationCredit: Getty
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Inflation is expected to reach 15%, driving up the price of fuel and food
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Energy regulator Ofgem plans to raise its maximum price to £3,615 in October, with a £250 rise in January and a promise of reviews every three months.
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Energy bill rises will come more often, Ofgem has said
The Bank of England also warned that inflation will reach 13%, the highest in the last 42 years.
The jump in interest rates of 0.5 percentage points is the biggest in 27 years.
The rise in rates will see mortgage payments rise by an average of £650 a year.
The dire economic conditions will cause real household incomes to fall for two consecutive years, the first time this has happened since records began in the 1960s. They will drop by 1.5% this year and 2.25% next year.
However, the recession will at least be less deep than the 2008 slump, with GDP falling to 2.1% from its peak.
Bank officials said the depth of the decline is more comparable to the recession of the early 1990s.
Unemployment is projected to rise again next year.
An economist predicted last night that the cost of living crisis is likely to last longer and hit harder than expected, while analysts believe the series of higher bills will leave one in five households without savings in 2024.
More pressure has been piled on households as energy regulator Ofgem confirmed today that their peak price will be reviewed every three months, instead of six.
The limit is expected to rise to £3,615 in October and a further increase of £250 in January.
Ofgem is expected to reveal the exact amount of the bill hikes at the end of August, with the next one coming into force from 1 October.
Jack Leslie, senior economist at think-tank Resolution, said: “With gas prices continuing to reach record levels, both households and businesses will see big increases in their energy bills over the winter and into 2023.
“It is very uncertain how long this high inflation will last, but it looks like the cost of living crisis will last longer and hit households harder than expected.”
Mortgage time bomb
There were also fears that many of the nine million mortgage payers in the UK, 6.8 million of them in England, would struggle to cope with a rate rise of 0.5 percentage points.
It could add around £74 a month, or £888 a year, to a typical variable rate mortgage. UK mortgage rates rose at their fastest pace in a decade in the six months to May.
The latest jump will further strain mortgage payers accustomed to low rates.
Greg Marsh, chief executive of cost of living forecasting group nous.co, said: “Lenders can and should do all they can to help.
“The last thing they need is a flood of damaging and costly foreclosures because borrowers can’t afford new repayments.
Concerns were also growing about the millions of homeowners who cannot switch mortgages maturing in the next two years unless they pay exit penalties.
Mum-of-two Lydia Joseph, a researcher from Faversham, Kent, pays £1,718 a month on a two per cent fixed mortgage.
She says the only way out of her current deal is to raise £12,000 in fees up front.
She said: “This would wipe out all our savings overnight.
“This whole thing feels like he’s facing the barrel of a gun.
“But if I don’t lose £12,000 now, my monthly mortgage payments next year could be more than half of my household pay.
“This situation hasn’t really happened in the last two decades because we’ve had falling or very low interest rates.”
Why are interest rates rising and will this help with inflation?
The Bank of England usually imposes interest rates to help reduce inflation.
The cost of borrowing increases when the base rate increases. In turn, this reduces people’s disposable income, which reduces demand and helps curb any price rises.
The consumer price index (CPI) measure of inflation hit a new 40-year high in June at 9.4%.
Inflation is a measure of how the price of goods and services has changed over the past year.
When it goes up, the prices of everyday items and basic items and bills also go up, which means budgets are getting squeezed.
An increase in the base rate discourages borrowing and subsequently reduces purchasing power in the hope of reducing inflation.
What happens when there is a recession?
A country is in recession when its economy contracts for a sustained period of time, instead of growing normally.
It is calculated using something called Gross Domestic Product (GDP), which in the UK is the value of all goods and services added up in pounds.
Generally speaking, if GDP has fallen for two quarters (or six months), a country is said to be in recession.
Recessions often lead to unemployment and wage stagnation.
There are many different factors that can cause a country to fall into recession.
The UK last went into recession in 2020 following the coronavirus pandemic.