“The Bank is forecasting stagflation and saying that the medicine is higher interest rates,” said Paul Dales, chief UK economist at Capital Economics.

He reckoned interest rates might need to climb to 3 per cent in the coming year, and - like many commentators - he did not rule out another sharp move of 0.5 percentage points in September or November.

Matthew Ryan, head of market strategy at financial services firm Ebury, said he had “run out of fingers and toes keeping track of the number of occasions that the MPC has revised upwards its inflation forecasts in the past year”.

“The priority now clearly remains focused on controlling inflation at the expense of growth,” he said.

The BoE said even the labour market would not escape the economic carnage: the unemployment rate, which is now at a historic low of 3.8 per cent, will march up to 6.3 per cent by 2025.

The Bank of England’s big problem is that no matter how high interest rates go, this will have little impact on household and business energy bills, which are being driven by the Ukraine war’s impact on global commodity and energy prices.

Inflationary pressures have “intensified significantly,” the BOE said in its statement. “The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom.”

Energy nightmare

The worst of the energy inflation is yet to come in Britain. The maximum amount that energy companies can charge households is set at fixed intervals by the regulator Ofgem, which in April jacked up the cap by 54 per cent, for an average annual gas-electricity bill of £1971 ($3440).

Energy analysis firm Cornwall Insights expects the next review, in October, will lift this to £3358, a 70 per cent surge.

The government has been shelling out money to help cushion the blow: every household is getting a £400 payment, with welfare recipients receiving an additional £650 grant.

On the business side of the ledger, Cornwall predicts that many companies might experience a fivefold surge in energy costs when their two-year contracts are renegotiated in October.

“While the business energy markets have so far managed to cope with the price increases ... October’s increase in bills, coupled with other economic concerns being seen in the market, could tip businesses over the edge,” Cornwall’s analysts said in a note.

“This is particularly true for certain firms whose profitability is most exposed to energy cost increases, including hospitality, leisure, retail and many in the industrial sector. ... The corresponding job losses [could] reverberate throughout the economy.”

The most recent GDP growth figure for Britain was 0.5 per cent in May, following a 0.2 per cent decline in April. The annual rate in the 12 months to May was 3.5 per cent.

But retail sales are falling, business confidence has declined, and the PMI flash economic indicators for both services and manufacturing are decelerating.

If the Bank of England continues raising interest rates as the economy begins to shrink, it would be the first time it has had to do this since the stagflationary doldrums of 1975.

Political pressure

The grim economic outlook is likely to put further pressure on the government, which has been accused of doing too little to ease the cost-of-living pressures and prevent a decline in living standards.

Prime ministerial hopeful Liz Truss has blamed the BoE for not moving sooner on inflation, and has vowed to review its mandate. But she is also proposing massive tax cuts that could further stoke inflation.

Meanwhile, the Bank is also trying to unload the holdings of government bonds that it bought to keep the economy afloat during the COVID-19 pandemic. It is looking to start selling off about £10 billion a quarter from September, followed by smaller sales of corporate bonds.