THE BANK of England has warned that the country is about to enter a recession it will not leave until the end of next year.

The dire forecast came as the Monetary Policy Committee voted to raise interest rates by 0.5 percentage points to 1.75 per cent, their highest level since January 2009.

HeraldScotland:

Andrew Bailey, the Governor of the Bank of England said the decision to hike rates was to try and tackle runaway inflation, which he expects to hit 13.3% in October, the highest level since September 1980.

Charities warned that the increase would hit hardest those already struggling with the cost of living crisis. 

The rise in interest rates means homeowners with an average standard variable rate mortgage will see their monthly payments rise by £59.17, according to Moneyfacts.co.uk.

People with a typical tracker rate mortgage will have to pay an extra £51.98 a month.

The Bank took to social media to explain its decision.

"We know the cost of living squeeze is difficult for many people," they wrote on Twitter.

"The squeeze on households’ incomes due to the rise in energy prices has led to slower growth in the UK economy. We expect the size of the UK economy to fall over the coming year.

"We’ve put up interest rates to help return inflation to our 2% target. What happens to interest rates in the coming months will depend on what happens in the economy.

"We expect inflation will be close to our 2% target in around two years. It’s our job to make sure that inflation returns to our 2% target, and that is what we will do."

Speaking at a press conference, Mr Bailey said the “further sharp increase in energy prices” had been the biggest development in recent months.

“Wholesale gas futures prices for the end of this year… have nearly doubled since May,” he said.

They are “almost seven times higher” than forecasts had suggested a year ago, he added.

“That’s overwhelmingly a consequence of Russia’s restriction of gas supplies to Europe and the risk of further cuts.”

The banker said there had been an “economic cost to the war” in Ukraine.

"But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2% target,” he added.

Mr Bailey continued: “Domestic inflationary pressures have also remained strong. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rise in their costs.

“The labour market remains tight with the unemployment rate of 3.8% in the three months to May and vacancies at historical high levels."

Labour's Shadow Chancellor, Rachel Reeves, said the news from the Bank was “further proof that the Conservatives have lost control of the economy”.

"As families and pensioners worry about how they're going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis,” she added.

Chancellor of the Exchequer, Nadhim Zahawi said the UK was facing "global economic challenges."

He added: "Addressing the cost of living is a top priority and we have been taking action to support people through these tough times with our £37 billion package of help for households, which includes direct payments of £1,200 to the most vulnerable families and a £400 discount on energy bills for everyone.

"We are also taking important steps to get inflation under control through strong, independent monetary policy, responsible tax and spending decisions, and reforms to boost our productivity and growth.

"The economy recovered strongly from the pandemic, with the fastest growth in the G7 last year, and I’m confident that the action we are taking means we can also overcome these global challenges.”

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."

Federation of Small Businesses (FSB) National Chair Martin McTague said there would be consequences to the hike.

"It’s removing steam from the economy at a time of meagre growth," he said. "Small businesses already face grave uncertainty as they try to recover from the impact of Covid, while contending with the cost of doing business crisis."