Bank of England raises interest rates to 0.75%
The Bank of England (BoE) has increased the base rate by 25 basis points to 0.75%.
The increase returns the cost of borrowing to where it was before the pandemic started two years ago, but is likely more jumps will follow.
It may be recalled that rates were increased from 0.1 to 0.25 per cent in December before being hiked to 0.5 per cent in January, marking the Bank’s first back-to-back increase since June 2004.
The bank's monetary policy committee voted 8-1 to increase the rate by 0.25 percentage points, with the disagreeing member voting to maintain the rate at 0.5 per cent.
Albeit Deputy Governor Jon Cunliffe voted to keep rates on hold, warning of a big hit to demand from higher commodity prices, BoE said Russia’s unprovoked invasion had forced it to rethink its forecast for the peak of inflation this year and it was now expected to be “several percentage points” higher than the 7.25% it had previously forecast.
Threadneedle Street reacts to prospect of Russia’s war in Ukraine pushing UK inflation peak to 10 percent.
The inflation rate is the average increase in prices based on how much things cost today compared to around one year ago. BoE said that the Bank’s Monetary Policy Committee (MPC) remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary policy framework.
Threadneedle Street indicated that the framework also recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. The country’s economy has recently been subject to a succession of very large shocks, the Bank said.
Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the UK, is likely to slow. Based on its current assessment of the economic situation, the BoE warned that some further modest tightening in monetary policy may be appropriate in the coming months, but there are risks on both sides of that judgement depending on how medium-term prospects for inflation evolve.
The Bank believes the annual inflation rate will rise to around 8% in the second quarter of 2022, and perhaps even higher later this year. “This could temporarily push inflation around the end of this year above the level projected in April, which was previously expected to be the peak. Further out, inflation is expected to fall back materially, as energy prices stop rising and as the squeeze on real incomes and demand puts significant downward pressure on domestically generated inflation.”
The Bank concluded by accentuating that it could do nothing to prevent higher prices for energy and other commodities hitting living standards.
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