The Bank of England has increased interest rates by 0.25% to 4.5%, citing its prediction of a longer period of higher inflation and a stronger economy. The Bank's monetary policy committee (MPC) voted for a 12th consecutive rise in interest rates, continuing its most aggressive rate-hiking cycle since the 1980s in an effort to curb UK inflation, which remains in double digits.
The Bank of England has increased the UK rates to the highest level since October 2008, when the global economy was in the grips of the financial crisis, in response to the expectation that inflation will remain higher for longer than previously forecast. According to the latest official data, the headline rate of UK inflation stood at 10.1% in March, which is the highest rate in the G7 group of advanced economies, and well above the Bank’s official inflation target of 2%. This increase in rates comes as the Bank continues to combat the double-digit inflation rate, marking the 12th successive increase in borrowing costs and continuing its most aggressive rate-hiking cycle since the 1980s.
The Bank of England has revised its inflation forecast for the year-end upwards to above 5%, compared with below 4% it forecast in February. This forecast is due to the high food prices, which have increased at their fastest annual pace since 1977, and a resilient jobs market. The rise in rates will help to dampen inflation and ease the pressure on the economy, which has been struggling with high inflation rates in recent months.
Despite intense pressure on households from the largest annual rise in living costs in 40 years, the Bank of England (BoE) forecast suggests that UK Chancellor Rishi Sunak would meet his target to halve inflation by the end of the year. In a recent report, the BoE announced that the UK economy was now on course to avoid a recession this year. The Monetary Policy Committee (MPC) stated that business confidence was improving, helped by a sharp decline in wholesale energy prices over recent months and government support announced at the budget in March. Consumer spending has also held up better than expected. The MPC said that the UK economy would feel little impact from recent turbulence in the US banking sector after the collapse of three medium-sized banks in as many months.
Although seven of the nine members of the MPC, including BoE Governor Andrew Bailey, voted for the rate increase, two members, Swati Dhingra and Silvana Tenreyro, voted to hold rates at 4.25%. They warned that the full impact of previous increases was yet to be felt by households and businesses.
The BoE had been warning in the autumn that the UK economy was heading for its longest recession on record, forecasting eight quarters of falling gross domestic product. However, despite issuing its largest ever growth upgrade, the rate-setting panel said on Thursday the economy would barely expand in the first half of this year. It forecasts near flatlining levels of activity as high inflation weighs on demand. The economy is expected to grow by just a quarter-point this year and remain below 1% for at least the next two years.
The decision comes after the US Federal Reserve raised its benchmark rate by a quarter-point to a range of 5% to 5.25% last week, and the European Central Bank also raised its key interest rate by a quarter-point to 3.25%.
The Bank of England has cautioned that high inflation may persist for longer than anticipated, as it attempts to curb persistent domestic price and wage setting. Publishing the minutes of its rate decision, the Bank stated that although the labour market was displaying some signs of weakness, unemployment had not risen as much as predicted, and wage growth remained robust, which was further contributing to inflationary pressures.
The Bank's most recent rate hike could not have come at a worse time for many UK households. Over 1.3 million families are expected to come to the end of fixed-rate mortgages before the end of the year, with millions more due to face higher borrowing costs next year as they switch from cheaper deals.
Furthermore, in a worrying development, the Bank hinted that businesses were raising prices to safeguard profit margins, implying that energy and food prices would fall more slowly than they had risen. This revelation follows concerns raised by consumer groups and trade union leaders that profiteering by firms risks cementing 'greedflation' in the UK economy, in which businesses exploit high inflation to increase prices.
The Bank of England's regional agents have identified that some firms were not passing on falling costs to customers to enhance their profit margins. Although the Bank expects inflation to fall below 5% by the end of the year, the minutes highlight that there are risks that it could persist for longer.
With another bank interest rate increase, how are you affected by today's news? If you are coming to the end of your mortgage term and looking for some independent advice or have loans that could be consolidated to save on an increased interest rate, give Steel and Co. Financial Services a call today on 01502 446000 or visit https://steelandcofinancial.co.uk