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Yesterday’s hefty rise in UK interest rates, from 1.25% to 1.75%, probably won’t be the last in this cycle, despite the looming recession.

Amarjot Sidhu, economist at BNP Paribas Markets 360, predicts rates could reach 2.5% by the end of the year:

In forecasting a prolonged recession and implicitly pointing to rate cuts eventually, the Bank of England stands apart from its peers despite delivering a similarly oversized hike.

In the short-term, the BoE is not done fighting inflation though, and we still see three more 25bp hikes this year.

Sidhu also believes the Bank’s medium-term forecasts for both growth and inflation will prove overly pessimistic.

Andrew Sentance, a former MPC policymaker, argued yesterday more steep rises are needed:

The #MPC has bitten the bullet – a 0.5 percent interest rate rise.A bigger rise could be justified this month but at least we have moved away from the 0.25 percent baby steps. We need to move up to 3-4 percent interest rates by the end of this year.

— Andrew Sentance (@asentance) August 4, 2022

Bank of England governor Andrew Bailey has hit back against criticism over his handling of the crisis, as pressure on Britain’s top central banker grows.

In an interview with the BBC’s Today Programme that we’ll hear later, Bailey has denied the Bank had been too slow to start raising interest rates.

Yesterday, attorney general Suella Braverman said interest rates should have been raised a long time ago (the Bank started raising rates last December)

The two candidates to become the next prime minister clashed over the solution to the crisis last night.

Liz Truss claimed a recession wasn’t inevitable, and that cutting taxes would help the economy grow. She’s promising an emergency budget if she succeeds Boris Johnson.

But Rishi Sunak, who appeared after Truss for a grilling from Conservative members on Sky News, stepped up his criticisms of Truss’s £30bn plan for unfunded tax cuts, claiming it would lead to “misery for millions”.

Sunal warned:

“The lights on the economy are flashing red, and the root cause is inflation. I’m worried that Liz Truss’s plans will make the situation worse.

“If we just put fuel on the fire of this inflation spiral, all of us, all of you, are going to just end up with higher mortgage rates, savings and pensions that are eaten away, and misery for millions.”

Here’s the full story, by my colleague Heather Stewart:

Introduction: UK faces ‘deepening economic crisis’ as recession looms

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK is heading into deepening economic misery, after a horror show of economic forecasts from the Bank of England yesterday.

Britain faces a bleak outlook — heading into a recession this winter that will last over a year, with inflation surging over 13%. Unemployment will rise and households will face a historical squeeze on living standards following the sharp jump in gas prices, the BoE said.

The economic costs of Vladimir Putin’s invasion of Ukraine have mounted, on top of an economy already hurt by the pandemic, and adjusting to the reality of Brexit.

The Bank’s grim warning came alongside the biggest rise in interest rates by the most in 27 years on Thursday, as its policymakers desperately try to get a grip on inflation (currently 9.4% and heading higher).

Jack Leslie and James Smith of Resolution Foundation have analysed the Bank’s monetary policy report, and say its forecasts are ‘disastrous’ for living standards.

They warn:

Despite the Government spending over £30bn in support, the Bank is forecasting that the economy will fall into recession later this year, contract for six successive quarters and not recover its pre-pandemic level within the forecast period (ending mid-2025). Inflation is now projected to peak higher – at an eye-watering 13.3% in October – and high inflation will now be with us for longer.

All this is disastrous for living standards: the Bank now expects that real household disposable income will fall by around 3.7% over the course of 2022 and 2023 – the largest such fall on record.

To pile misery onto families, the Bank forecasts that unemployment will rise by roughly 900,000 people; the Bank sees this as sufficient to keep inflation from becoming entrenched.

What do today’s @bankofengland announcements mean for households? Average real post-tax household incomes are expected to fall by around £2,000 across this year and next. The Government will inevitably need to do more to shield families from the worst effects of this crisis.

— Resolution Foundation (@resfoundation) August 4, 2022

But the big news is the Bank’s grim outlook for this winter, with inflation forecast to peak at 13.3 per cent in October – higher the previously thought. In addition, this high inflation is also expected to last longer, reflecting higher gas prices.

— Resolution Foundation (@resfoundation) August 4, 2022

A weaker economy is projected to lead to a rise in the unemployment rate from its current level of 3.8 per cent to above 6 per cent. This, combined with higher and long-lasting inflation, means that real household disposable income could fall by 3.7 per cent across 2022 and 2023.

— Resolution Foundation (@resfoundation) August 4, 2022

Rising energy prices will lead families and businesses to cut back spending on other items, with higher prices overall meaning spending will not go as far. This leads to a significantly weaker outlook for the economy – hence the Bank expecting a recession in Q4 this year.

— Resolution Foundation (@resfoundation) August 4, 2022

Leslie and Smith says there is no quick fix to rising energy costs. So the next prime minister must do more to shield families from the worst effects of the crisis, focused on low-to-middle income households.

All this lays bare the challenges for the next Prime Minister: although they might hanker after a honeymoon period, the reality is that the deepening economic crisis will be top of their ‘to-do’ list – and in particular providing support focussed on low-to-middle-income households – when they step into 10 Downing Street on 5 September.

Also coming up today

The latest US jobs report is due later, showing the health of America’s employment market as its economy slows. Economists predict job creation slowed in July, to 250,000 from 372,000 in June.

The agenda

  • 7am BST: Halifax house price index for July
  • 1.30pm BST: US jobs report for July

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