The Bank of England today raised its base rate by 50 basis points from 1.25% to 1.75%.
Fears of inflation hitting 15% in the autumn have spurred the Bank to rapidly increase the base rate.
A shred of positive news from the Money Policy Committee (MPC), which decides on rates, is that inflation is expected to “dissipate” although it may take several years for it to come down to levels seen in the past few years.
The current rate of CPI inflation is 9.4%, a 40 year high, and has been rising rapidly.
Members of the Bank’s Monetary Police Committee voted 8-1 to increase the rate to 1.75% to help tackle inflation. Only one member wanted a lower increase of 0.25%.
The MPC said that inflationary pressures in the UK and the rest of Europe have “intensified significantly” since the May Monetary Policy Report and the MPC’s previous meeting. It added that this largely reflected a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
The MPC said the increase in energy prices would exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
CPI inflation is now expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, the MPC said. It expects inflation to, “remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”
GDP growth in the United Kingdom is slowing and the latest rise in gas prices has led to another deterioration in the outlook for activity in the UK and Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth is predicted to turn negative.
The MPC says that inflationary pressures are “expected to dissipate” over time and it has reiterated that its 2% inflation target, “applies at all times.”
The MPC said it was “provisionally minded” to commence gilt sales shortly after its September meeting, subject to economic and market conditions being judged appropriate.
The latest base rate rise is the sixth in a row for the Bank, which had previously held rates steady for over three years.
Rupert Thompson, investment strategist at Financial Planner and investment manager Kingswood, said: “The Bank’s latest economic forecasts tell a depressing story. It now expects the economy to fall into recession in the fourth quarter of 2022 and shrink for five consecutive quarters with GDP falling 2.1% over this period. At the same time, it is now forecasting inflation to peak above 13% later this year and to remain very elevated through the course of next year.”
Andrew Megson, executive chairman of My Pension Expert, said: “Make no mistake, the current economic climate is very difficult to navigate and the consequences are far-reaching. Over-50s are coming out of retirement in their thousands (7% of over-50s in work currently have “unretired” in 2022, according to My Pension Expert’s latest research) due to the cost-of-living crisis. Many more will be worried about their financial futures.”
Les Cameron, financial expert at M&G Wealth, said: “Today’s interest rate hike from 1.25% to 1.75%, will not come as a real shock to anyone. But, the more important factor is how this shift impacts savings rates and borrowing rates.
“As inflation continues to rise, increases in savings rates mean that, for the majority of cash or near-cash savers, for example National Savings & Investments, their money is being eroded in real terms. Many of those with cash savings are pensioners, who spend a higher proportion of their savings on energy bills and are likely to feel the effects considering the sky-high energy prices. With the soaring cost-of-living factored in, the erosion is going take a bigger toll on people’s savings, and those repaying debt which is not on a fixed rate are likely to feel the brunt of the rises more than others.”
“Staring down the barrel of potential double-digit inflation means reviewing your finances and ensuring your savings can weather future challenges is now more important than ever.”
Annabelle Williams, personal finance specialist at Nutmeg, said: “There hasn’t been a 0.5% rate rise for more than a quarter of a century, and the expectation is that bringing interest rates to a higher level at a swifter pace will be more effective at calming inflation, which reached 9.4% on the CPI measure in June.
“The prospect of lower inflation should provide some relief to households and businesses struggling with the highest inflation for 40 years. But a rise in interest rates will take time to dampen down prices and there’s no guarantee of how far prices will fall. The wave of inflation that’s come over the UK since last autumn has partly been caused by international issues including supply chain and shipping problems in Asia.”
• The Bank of England has moved to reviewing the base rate approximately 8 times a year with the next review on 15 September.
