Bank of England warns UK economy to shrink as interest rates rise

The Bank of England has warned that the UK economy will shrink this year as it raised interest rates to try to stem the pace of rising prices.

Interest rates rose to 1% from 0.75%, their highest level since 2009 and the fourth consecutive increase since December.

Inflation, at its highest for 30 years, is set to breach 10% by the end of the year, with fuel, energy and food costs soaring.

The UK economy is now expected to contract in the final three months of this year.

Alpesh Paleja, CBI Lead Economist, said: ‘Another rise in interest rates is warranted, given the persistence of high inflation. However, the Monetary Policy Committee are walking an increasingly fine line.

‘Further action to curb price pressures needs to be weighed against the increasing need to protect growth, particularly in light of a historic cost-of-living crunch. Households are feeling it and so are businesses, with cost pressures across the board.

‘While monetary policy is the appropriate first line of defence in tackling inflation, government needs to take further action to shore up the broader resilience of the UK economy. In the near-term, higher inflation will hit poorer households hardest, so support measures for this group will need to be kept under review.’

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