The Bank of England raised the interest rate from 0.75% to 1%.
This was the highest policy rate set in the UK since 2009.
The Central Bank warned that this decision, taken after the country’s highest inflation rate in the last 30 years, could lead to a contraction in the economy.
Inflation, which was announced as 7 percent, well above the 2 percent target of the Central Bank in March, is expected to exceed 10 percent by the end of the year.
Economists state that households are trying to reduce consumption and save money due to rising food and energy prices, which reduces their growth expectations in the economy.
Yesterday, the US Federal Reserve (Fed) increased the policy rate from 0.25-0.50 to 0.75-1.00 percent.
The Bank of England Monetary Policy Committee estimated that the economy will start to shrink in the last quarter of the year and will shrink by 0.25 percent in 2023.
In its previous forecast, the committee had predicted a growth of 1.25% for 2023. BBC Economy Editor Faisal Islam states that even this rate is the lowest among the G7 countries.
The growth expectation for 2024 was also reduced from 1 percent to 0.25 percent.
Bank of England Governor Andrew Bailey said that there was a risk of a rapid slowdown in the economy, but chose not to use the word recession.
For an economy to have a recession, the economy must contract for two consecutive quarters.
The Bank of England estimates that the contractions will be intermittent rather than sequential.
BBC Economy Editor Faisal Islam states that energy prices are expected to increase by 40 percent until autumn, and that it is difficult to predict the effects of the Bank of England’s interest rate hike due to uncertainties in the global economy.