The Bank of England moved to raise interest rates by 50 basis points for the first time since 1995 on Thursday as it predicted UK inflation would soar above 13% before the end of the year.
The move by the BoE's monetary policy committee took the benchmark interest rate to 1.75%, the highest since 2008.
In a report accompanying the decision, the BoE said the economic outlook had looked bleak since its last meeting in May, and it now expected a recession to hit by the end of the year.
The central bank forecast inflation would rise above 13% in the fourth quarter, up from a 40-year high of 9.4% in June, reflecting a surge in natural gas prices following Russian supply cuts to Europe. It said inflation would remain at "very high levels" in 2023.
"The United Kingdom is now projected to enter a recessionary phase beginning in the fourth quarter of this year," said the BoE. "Real household after-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative."
The pound slipped after the decision, shedding 0.26% to trade at $1.21. London's FTSE 100 index rose 0.31% as equity markets across Europe rose on Thursday.
The BoE signaled last month that it was considering up to a 50 basis point, or 0.5 percentage point, interest rate hike in August. The central bank usually raises and lowers rates in increments of 25 basis points.
In the United States, the Fed has made two interest rate increases of 75 basis points to curb inflation. Economists say the Fed's hike puts pressure on other global central banks to follow suit, as it encourages the strengthening of the US dollar and indirectly weakens foreign currencies, making other countries' imports more expensive.
"The biggest hike in 27 years is the minimum action required by the Bank of England at this stage," said Seema Shah, chief strategist at Principal Global Investors. "With inflation expected to reach 13% later this year and expected to remain high until next year, the central bank will need to tighten policy at a rapid pace."
Analysts added, Unfortunately, policy tightening will inevitably affect the UK economy. Higher mortgage payments and borrowing costs will only exacerbate the cost of living crisis, straining household budgets in a way we haven't seen in over 60 years. .”
