Home Business Bank of England raises interest rates to highest level in 13 years

Bank of England raises interest rates to highest level in 13 years

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Bank of England raises interest rates to highest level in 13 years

Inflation will spike to a 40-year high by October and the UK risks being plunged into a recession, the Bank of England has warned, as it hiked interest rates to their highest level since the financial crisis.

The Bank raised rates by 0.25 per cent to 1 per cent in a bid to tame rampant increases in living costs, while forecasting that the UK economy will shrink in the final quarter of the year.

In comments that will pile pressure on chancellor Rishi Sunak to support struggling families, the Bank said that there was little it could do to help with an unprecedented spike in energy bills and the second-biggest fall in living standards since records began.

Labour accused government minsters of “shrugging their shoulders” at the living-costs crisis, while economists called on Mr Sunak to offer more financial assistance to prevent the UK falling into recession.

Households are expected to be hit with a devastating 40 per cent rise in energy bills this winter, sending inflation to 10.25 per cent – a level not seen since 1982.

Average gas and electricity bills are forecast to hit £2,800 when Ofgem raises its price cap to reflect a rise in wholesale energy costs that have been exacerbated by the war in Ukraine. Prices of food and other essential goods are also expected to continue to rise, the Bank’s Monetary Policy Committee (MPC) said on Thursday.

The MPC warned that, while wage growth will be stronger than previously forecast, household disposable incomes will continue to fall sharply. As consumers cut back on spending, the economy is expected to contract in the final quarter of 2022.

The income squeeze is forecast to peak later this year before easing in 2023 but spending will continue be constrained by persistently high energy prices.

While the UK will technically avoid a recession – defined as two quarters of negative growth – it will come as little comfort as households face an average £1,200 hit to their incomes.

“This awful outlook for living standards may make monetary policy decisions harder, but it makes fiscal policy decisions far easier,” said James Smith, deputy director of the Resolution Foundation.

“The Government can’t shield us all from the pain of rising energy costs, but can and must provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis.”

The Bank now forecasts zero growth in 2023, followed by 0.2 per cent in 2024 and 0.7 per cent in 2025. The figures will add to growing pressure on Rishi Sunak to do more to help households struggling with rising bills.

Despite what it called a “material deterioration in outlook” for the UK and global economies, the MPC voted in favour of a fourth consecutive 0.25 percentage point interest rate rise in a bid to tame inflation.

Consumer Price Index inflation is already running at 9.1 per cent in the second quarter of this year – the highest level in four decades.

The MPC conceded that monetary policy could do little to offset what will be the second-largest fall in disposable incomes since records began. It expects inflation to fall sharply in 2023, before dipping below the Bank’s 2 per cent target rate in 2024 and reaching 1.3 per cent in 2025.

The Bank said it took the decision to hike rates because of “the tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist”.

It also warned there was a risk that energy prices could rise more than expected this winter, particularly if flows of Russian gas into Europe slow significantly.

“Under such a scenario, European gas prices would be likely to increase sharply and gas quantities could be rationed going into next winter as EU gas stocks might run low,” the Bank said.

It cautioned that Russia’s war in Ukraine, coupled with potential serious outbreaks of Covid in China could cause further disruption to supply chains, pushing inflation up further.

Thursday’s 0.25 per cent increase takes the base rate to its highest level in 13 years, pushing up monthly mortgage payments for borrowers on variable and tracker deals.

Three members of the nine-person committee wanted tougher action on inflation, calling for a 0.5 per cent rate hike.

Markets are pricing in a series of further increases in coming months, taking the base rate to 2.5 per cent. The MPC confirmed on Thursday that it considered “some degree of further tightening of monetary policy may still be appropriate in the coming months”.

Labour’s shadow chancellor, Rachel reeves, said rising interest rates and dire economic forecasts would “seriously worry” families across the country already dealing with soaring prices and bills.

“Not only are Ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with fifteen Tory tax rises that will further stifle our economic growth,” she said.

The Bank also signalled that it may soon begin to sell off the £875bn of government bonds it has purchased under its quantitative easing programme.

Staff have begun working on a strategy for the sell-off but a decision on whether to go ahead has been put off until future MPC meetings and remains dependent on economic circumstances.

Nonetheless, it marks a major turning point after 13 years of ultra-loose monetary policy since the financial crisis.

It comes as the US Federal Reserve announced its biggest single interest rate increase since 2000.

The central bank increased its target federal funds rate to a range of 0.75 per cent to 1 per cent.

https://www.independent.co.uk/news/business/interest-rates-bank-of-england-rise-b2072070.html

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