Bank increases interest rate to 1.25%
The base rate has been increased by 0.25% to 1.25% in the third rise this year following the latest meeting of the Bank of England
The decision on the rate rise was opposed by three members of the monetary policy committee who argued for a 0.5% increase in the rate. The US Federal Reserve has taken even starker action to stem rising inflation with a 0.75% increase in rates to 1.75% announced yesterday.
In the UK, the announcement follows the April inflation figure of 9%, which has increased significantly this year as a result of the energy crisis and soaring food prices, making the rate the highest for 40 years.
The Bank’s central projections in the May Monetary Policy Report expect UK GDP growth to slow sharply over the first half of the forecast period and, although the labour market was expected to tighten slightly further in the near term, the unemployment rate was projected to rise to 5.5% in three years’ time from the current 3.8%.
Worse news for households and businesses is that CPI inflation was expected to average 11% at its peak in 2022 Q4, due to the additional large increase in the Ofgem price cap in October.
However, inflation is expected to fall to a little above the 2% target in two years’ time, largely reflecting the waning influence of external factors, and to be well below the target in three years, mainly reflecting weaker domestic pressures.
UK GDP was weaker than expected in April, partly reflecting a further decline in Test and Trace activity. Bank staff now expect GDP to fall by 0.3% in the second quarter as a whole.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘Worries will ratchet up that given inflation is set to soar to the eye watering levels of 11%, the Bank of England is going to be seriously behind the curve in attempts to bring it down.
‘There is dissent around the table, with policymakers charged with administering this bitter pill for the economy split on the course of action to take. Three members wanted to see a steeper 0.5% rise, and that concentrated dose may well be given in the months to come if these red hot prices show no sign of easing.
‘If demand is already slowing this could mean that the Bank of England may keep on its more cautious path for monetary policy in the future. But it will need to see inflation coming down significantly from its red-hot levels, before it can step off the pedal of rate rises.’
Alpesh Paleja, CBI lead economist, said: ‘With inflation high and price pressures remaining acute, the Bank of England has rightly raised interest rates again to anchor inflation. But with the outlook looking weaker, monetary policy is walking an increasingly fine line between taming inflation and supporting economic activity.
‘We expect only meagre economic growth ahead, as a historic squeeze on household incomes bites hard on spending. Monetary policy can only do so much, and must now be coupled with government action to prevent a deeper and more prolonged downturn. Creating a permanent investment incentive and tackling skills shortages by introducing immediate flexibility to the apprenticeship levy would be strong first steps for boosting confidence.’
Story wrote by Sara White.