The Bank of England expects a recession which could last for five quarters, or 16 months, to begin before the end of 2022.
As part of its announcement of an increase in the base rate of 0.5 percentage points to 1.75 per cent, the central bank drastically revised downwards its forecast for the economy across a range of metrics, including anticipating that inflation will peak at 13 per cent and remain above 5 per cent well into next year.
It also predicted an even steeper decline in consumer disposable income than in its previous forecasts.
It anticipated that UK GDP would fall by around 2 per cent as a result of the recession, and that unemployment would rise.
A recession which begins in the final quarter of 2022 and lasts for five quarters would not end until the end of 2023.
Simon French, chief economist at Panmure Gordon, said the Bank's forecasts were too pessimistic because they did not reflect the positive impact on UK GDP that would come from the Treasury’s £35bn stimulus into the economy later this year, a stimulus which is designed to help consumers with energy bills.
The forecast from the Bank of England can be seen in the context of the US economy having entered a technical recession at the end of June.
Luke Bartholomew, senior economist at Abrdn, said raising rates at the same time as predicting a deep recession was a “toxic combination”, but he did not expect the economic decline to cause the Bank to deviate from its policy of raising rates to curb inflation, as its mandate is to control inflation.
Bartholomew said that, with inflation forecast to remain above target, the central bank wouldn't want to do anything which could support growth, if that also meant causing inflation to persist.
The scale of the deterioration in the bank’s view of the economy was revealed by Laith Khalaf, head of investment analysis at AJ Bell, who said: “The Bank’s frightening forecasts have shifted to a shocking extent in just three months.
"The UK economy is predicted to shrink by 2.1 per cent over the next year, more than double the 0.8 per cent contraction envisaged by the Bank as recently as May. CPI inflation is expected to come in at 9.5 per cent over the next year, up from the 5.9 per cent forecast in May.
"Every time we hear from the Bank of England these days, it thinks inflation is going to go higher, and last longer than its previous estimates. Economic trends do eventually tend to moderate and change direction, but it would be naïve to suppose that when the Bank produces its next economic report in November, we shouldn’t be braced for more bad news."