(Bloomberg) -- The Bank of England unleashed its biggest interest-rate hike in 27 years as it warned the U.K. is heading for more than a year of recession under the weight of soaring inflation.

The half-point increase to 1.75 per cent was backed by eight of the bank’s nine policy makers, who also kept up a pledge to act forcefully again in the future if needed, potentially putting similar hikes on the table for coming meetings.

The move came as officials predicted a U.K. recession will begin in the fourth quarter, and last all the way through next year. That’s the longest slump since the financial crisis. Officials expect the economy to shrink by around 2.1 per cent in total.

The BOE also boosted its forecast for the peak of inflation to 13.3 per cent in October amid a surge gas prices, and warned that price gains will remain elevated throughout 2023. That will sharpen a cost of living crisis that will see real disposable incomes fall more than at any time in around 60 years.

Even after billions of pounds of government support for struggling households, families are set to be around 5 per cent worse off by the end of 2023 with incomes falling both this year and next.

Set against the gloomy outlook, the half-point hike, unprecedented since the BOE gained independence in 1997, is a sign officials are calling time on the era of cheap money and scrambling to keep pace with a wave of global tightening from its international peers.

The forecasts, based on average energy bills increasing by 75 per cent to around £3,500 in October, also highlight the scale of the challenge awaiting the victor of the race to replace Boris Johnson as UK prime minister.

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

Alongside the decision, the BOE also laid out its plans for reducing the mammoth government bond holdings it amassed during the crisis. 

Active sales, the first carried out by a major central bank, are likely to start after a confirmatory vote in September and will be in the region of around £10 billion a quarter. Including redemptions, the BOE sees its stock of gilts declining around £80 billion in the first year of the program. Officials said there would be a “high bar” to altering the plan.

Sales of the far smaller holding of corporate bonds will begin in the week starting Sept. 19, the BOE said.

Taken together the moves represent a significant step up in the BOE’s battle against inflation.

While the UK central bank was the first major central bank to hike rates after the pandemic, and has moved at every meeting since December, it had thus far stuck to smaller, more usual moves. That left it risk of falling behind the curve, with some 70 other central banks having moved by a half-point or more this year.

The Federal Reserve has raised interest rates by 75 basis points at its last two meetings, while even the European Central Bank kicked off its cycle in July with a half-point rise.

The BOE forecasts, based on a market path for interest rates that peaks at 3% next year, show the economy contracting about 1.25 per cent in 2023 and a further 0.25% the following year. Unemployment, meanwhile, will climb to 6.3 per cent by 2025.

Inflation will peak above 13% later this year, and still be at 9.5 per cent in the third quarter of 2023. After that it will fall rapidly toward the 2 per cent target as the recession saps demand.

The decision feeds into an increasingly acrimonious debate about who is responsible for growing cost-of-living crisis.

The BOE has been blamed in some quarters for acting too slowly in face of the growing inflation threat, and Liz Truss, who is favored to win the race Johnson as prime minister, has vowed to sharpen the BOE’s mandate if she takes power.

The contest for the leadership has also made the task of forecasting the economy harder. The final two candidates are offering widely differing views on tax cuts and borrowing levels, with front runner Liz Truss advocating the more radical path.

By convention, the BOE bases its forecasts on announced government policy, so the predictions don’t take into account anything brought up during the campaign.

With inflation soaring, the vote split on rates was more forceful than expected, with most economists expecting the nine-member Monetary Policy Committee to vote 7-2 for a 50 basis-point hike. 

Only Silvana Tenreyro backed a smaller move, saying rates may already have reached a level consistent with returning inflation to target and flagging worries about squeezed household incomes.

Minutes of the meeting showed officials kept in a pledge to move “forcefully” on rates if needed in future - language which paved the way for the half-point hike this month. Policy makers also added guidance that “policy was not on a preset path.”

The BOE also said it plans to sell gilts from its holdings evenly across “buckets” of short, medium and long-maturity gilts, and will not schedule a gilt sales operation on the same day as an operation by the U.K.’s Debt Management Office. 

The BOE will also launch a new Short-Term Repo facility, designed to keep short-term market rates close to the BOE’s key interest rate as it reduces the size of its balance sheet.