(Bloomberg) -- The UK is headed for a “mild recession” this year as higher-than-expected inflation and rising interest rates take their toll on household finances, according to Moody’s. 

The credit ratings agency said the increase in the UK’s core inflation rate — which does not include food or energy — “raises the odds of further rate hikes.” Moody’s expects at least another 25 basis point hike from the Bank of England this year, taking its base rate to 4.75%.

In a report released Wednesday, Moody’s said it expected the economy to shrink by 0.1% in 2023 “as the impact of higher prices and tighter financing conditions continues to feed through the economy.”

Read more: UK House Prices Resume Decline With Warning of Headwinds

“We expect BOE‘s policy rate to peak at 4.75% and for monetary policy to remain tight over the coming years, which will weigh on consumption and investment,” the report said. “The UK’s relatively short-dated mortgage market means that around half of outstanding mortgages have a floating rate or will need to be refinanced at higher rates this year, which will reduce household disposable income.”

Germany is also forecast to suffer a mild recession on Moody’s projections, though its economy will not contract for 2023 as a whole. The UK was the only country from the advanced economies in the Group of 20 predicted to shrink this year.

While Moody’s forecast is less optimistic than the BOE’s May projections, which have the UK dodging a recession this year, it is an upgrade from its earlier projections which predicted an 0.4% contraction for the full year. The International Monetary Fund last month also erased its forecast for a UK recession this year.

The outlook across all forecasters is much improved from the BOE’s November estimates, which slated the longest recession for the UK in modern history.

Moody’s said that even when central banks paused their rate hikes, high but decelerating inflation would still mean rising short-term real interest rates. It does not expect the Federal Reserve, the European Central Bank or the Bank of England to “return to long-term neutral policy rates” until 2025-2026. 

Read more: 

  • BOE’s Mann Says Pandemic-Era Savings Is Still Fuelling Inflation
  • BOE’s Haskel Signals Support for More UK Interest Rate Hikes
  • BOE Governor Says UK Inflation Is Taking Longer to Come Down

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