Action on inflation

Bank of England confirms interest rate rise to 0.5%

Bank of England
Bank of England (pic: Terry Murden)

Interest rates have been raised, as predicted, from 0.25% to 0.5% on a day that also saw energy bills hiked by 54%.

Bank of England rate-setters confirmed the rise in the base rate following December’s uplift, the first time this has happened in consecutive months since 2004.

Four of the nine-member monetary policy committee voted for a 0.5% increase, effectively confirming that this hike will be the first of up to five rises this year as the Bank attempts to tame inflation, currently at a 30-year high.

Some, however, question whether raising UK rates will have any real impact when many of the inflationary pressures, such as whole gas prices, are non-domestic.

Borrowers, including businesses, will be hit by higher lending charges, but the news will be welcomed by savers who have suffered from years of rock bottom rates.

Luke Bartholomew, senior economist at Abrdn, said: “The decision to increase rates by 0.25% today was widely expected by markets, but the fact that four members of the Monetary Policy Committee voted for a 0.5% increase will come as a shock to many.

“Investors and households have got used to quite gradual increases in the level of rates, so the fact that so many policy makers thought a large increase was appropriate today will put markets at notice that more sudden shifts in policy are possible, which will increase uncertainty and volatility. It is also a sign of how concerned the Bank is about the inflation environment.”

Adrian Lowery, personal finance expert at investing platform Bestinvest, said the split voter on an even higher hike, “really suggests an increase in ‘hawkishness’ on the MPC over inflation, and reading into the report this is because they think there is a lot of inflation risk. The Bank’s forecast for peak inflation this year has risen to an eye-watering 7.25% in April.”

Suren Thiru, head of economics, at the British Chambers of Commerce, said: “The Bank of England is seeking to dampen an inflationary surge it has little control over. Higher interest rates will do little to limit the soaring energy costs and persistent supply chain disruption that are driving the current spike in inflation. 

First with the news: our story last Friday

“With the increase in Ofgem’s energy price cap from April set to push inflation to around 7%, despite government support, further interest rate rises are inevitable. However, raising rates too aggressively risks undermining confidence and lowering growth.  

“There should be a greater focus on government’s Supply Chain Advisory Group and Industry Taskforce to work with industry to deliver practical solutions to ease the supply constraints that continue to drive the upward pressure on prices. 

“Action to limit the unprecedented surge in costs facing businesses, including financial support for those struggling with soaring energy bills, would help ease the pressure on firms to increase prices further.”  

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