Hard-up Brits hit by year-long recession this winter as interest rates hit 1.75%, inflation soars & energy bills rocket | The Sun
HARD-PRESSED families have been hit with a record interest rate rise to 1.75% as the Bank of England warned of a year-long recession hitting this winter.
Today has been dubbed Black Thursday as Brits are hit by a triple whammy of soaring rates, inflation and energy bills.
The Bank of England also warned inflation will hit 13% – the highest for 42 years.
The interest rate jump of 0.5 percentage points is the biggest in 27 years.
The rate hike will see mortgage payments rocketing by an average of £650 a year.
The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s. They will drop by 1.5% this year and 2.25% next.
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However, the recession will at least be shallower than the 2008 crash, with GDP dropping up to 2.1% from its highest point.
Bank officials said that the depth of the drop is more comparable to the recession in the early 1990s.
Unemployment will start to rise again next year, according to the projections.
One economist predicted last night the cost-of-living crisis is likely to last longer and hit harder than anticipated, while analysts believe that the raft of higher bills will leave one in five households with no savings by 2024.
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More pressure was piled on households as energy regulator Ofgem today confirmed it's price cap will be reviewed every three months, instead of six.
It's been estimated that the cap will rise to £3,615 in October, and a further £250 rise in January.
Ofgem is expected to reveal the exact amount bill hikes will be at the end of August, and the next will come into effect from October 1.
Jack Leslie, a senior economist at the Resolution think-tank think-tank, said: “With gas prices continuing to reach record levels, both households and businesses will see large increases in their energy bills throughout the winter and into 2023.
“How long this high inflation will last is hugely uncertain but the cost-of-living crisis looks set to last longer and hit households harder than previously anticipated.”
Mortgage ticking time bomb
There were also fears that many of the nine million mortgage-payers in the UK — 6.8million of them in England — will struggle to cope with a 0.5 percentage point rate rise.
It could add about £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 put yet more mortgage-payers long used to low rates in serious difficulties.
Greg Marsh, chief executive of cost-of-living forecast group nous.co, said: “Lenders can and must do whatever they can to help.
“The last thing they need is a flood of damaging and expensive repossessions because borrowers can’t afford the new repayments.
Concerns were also growing for the millions of householders unable to switch mortgages which are due to expire in the next two years unless they pay punishing exit charges.
Mother-of-two Lydia Joseph, a researcher from Faversham, Kent, pays £1,718 a month on a mortgage fixed at two per cent.
She says that the only way she can get out of her current arrangement is to stump up £12,000 in fees upfront.
She said: “That would wipe out all our savings overnight.
“The whole thing feels like I’m facing down the barrel of a gun.
“But if I don’t forfeit £12,000 now, my monthly mortgage payments next year could be more than half my household take-home pay.
“This situation has not really come up in the past 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 typically puts up interest rates in a bid to help lower inflation.
The cost of borrowing rises when the base rate increases. In turn, this reduces people's disposable income, which in turn drives down demand, helping to slow any price rises.
The consumer price index (CPI) measure of inflation hit a new 40-year high in June – sitting at 9.4%.
Inflation is a measure of how the price of goods and services have changed over the past year.
When it goes up, prices on everyday items and essentials and bills also rise – which means budgets are being squeezed.
A rise in the base rate discourages borrowing and subsequently reduces spending power in the hope to bring inflation down.
What happens when there is a recession?
A country is in recession when its economy shrinks over a sustained period of time, rather than growing normally.
It is calculated using something called Gross Domestic Product (GDP), which in the UK is the value of all the goods and services added up in pounds.
Generally speaking, if the GDP has fallen over two quarters (or six months), a country is said to be in recession.
Recessions usually lead to unemployment and wage stagnation.
There are lots of different factors that can cause a country to tip into a recession.
The UK last went into recession in 2020 after the coronavirus pandemic hit.
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