THE Bank of England has made its biggest increase in UK interest rates in 27 years while inflation is expected to peak at 13.3% in October.

The Bank has raised interest rates to 1.75% from 1.25% - the highest level since January 2009.

It is also expected Consumer Prices Index Inflation will hit its highest level since September 1980 in two months’ time climbing to 13.3% if regulator Ofgem hikes the price cap on energy bills to around £3,450, the Bank’s forecasters said.

The energy price will push the economy into a five-quarter recession – with gross domestic product (GDP) shrinking each quarter in 2023.

“Growth thereafter is very weak by historical standards,” the Bank said on Thursday.

OFGEM has also confirmed the energy price cap is to be updated quarterly rather than every six months as it warned customers face a “very challenging winter ahead”. 

The value of the pound dropped 0.05% lower against the US dollar at 1.211 shortly after the Bank of England’s rate rise was confirmed at midday, having been 0.7% higher ahead of the announcement.

The pound has dropped 0.5% against the euro to 1.189.

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.

However, the recession will at least be shallower than the 2008 crash, with GDP dropping up to 2.1% from its highest point.

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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.

The Bank said that it expects inflation to come back under control in 2023, dropping below 2% towards the end of the year.

“The United Kingdom is now projected to enter recession from the fourth quarter of this year,” the Bank’s Monetary Policy Committee (MPC) said.

“Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”

All but one member of the MPC, which sets interest rates, voted for the base rate to rise by 0.5 percentage points to 1.75%.

SNP MSP Natalie Don has said the UK Government has "lost all control" of the economy.

She said: “This is extremely worrying news for anyone with a mortgage – especially those without a fixed rate deal. With Interest Rates going up to 1.75%, those on a typical tracker mortgage will have to pay about £52 more a month. Those on standard variable rate mortgages will see a £59 increase.

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“This interest rate rise will also impact on those who have loans including credit cards, bank loans and car loans.

“It’s clear the UK Tory Government has lost all control of the economy, allowing energy companies to make massive profits while people are struggling with vastly increased food and fuel costs. This interest rate rise will add more misery to everyone who is struggling due to the Tory-created cost-of-living crisis.”

GDP is set to grow by 3.5% this year, the Bank said, revising its previous 3.75% projection downwards. It will then contract 1.5% next year, and a further 0.25% in 2024.

Meanwhile, real post-tax household income will fall 1.5% this year and 2.25% next, it said.

The Bank of England has raised interest rates to 1.75%Natalie Don has said the Tory UK Government has lost control of the economy

ITV's political editor Robert Peston has also highlighted the Bank of England is planning to reverse quantitative easing in September by starting to sell government bonds, which is likely to increase the cost of borrowing for the UK Government. 

Citizens Advice Scotland financial health spokesperson Myles Fitt said: “So many households in Scotland are struggling to make ends meet already.

"With energy bills, petrol costs and other payments higher than ever while wages stagnate, CABs are seeing increasing numbers of people who are just unable to cope.

“Today’s rise in interest rates will hit such people hard, making it even harder for them to meet their daily living costs. Governments need to recognise the scale of the crisis and make more support available to those who are struggling.

“In the meantime, anyone who needs help with their finances can get free, confidential and impartial advice from their local CAB [Citizens Advice Bureau], or at our self-help tool.”

Tory leadership hopeful and former chancellor Rishi Sunak has vowed to get a grip on inflation if he becomes prime minister.

He said: “One of the most urgent challenges we face as a country is getting inflation under control as quickly as possible.

"The Bank has acted today and it is imperative that any future government grips inflation, not exacerbates it.

“Increasing borrowing will put upward pressure on interest rates, which will mean increased payments on people’s mortgages. It will also make high inflation and high prices last for longer, making everyone poorer.

“As prime minister I would prioritise gripping inflation, growing the economy and then cutting taxes.”