Bank of England hikes cost of borrowing
The cost of borrowing has increased for the third time in four months as the Bank of England seeks to tame rampant inflation.
The rise in the base interest rate to 0.75% from 0.5% comes as prices are climbing faster than pay, squeezing household finances. Inflation is currently at 5.5% well above the 2% targeted by the Bank.
The interest rate is now at its highest level since March 2020, when the Covid pandemic began.
Energy bills and food costs are increasing and there is concern the war in Ukraine will push prices up further.
The 8-1 vote by the Bank’s Monetary Policy Committee follows the US Federal Reserve’s vote last night to raise interest rates by a quarter of a percentage point to 0.5%.
In a statement the Fed said that ongoing increases in the target range will be appropriate, taken to mean that there will be a series of interest rate increases of 25 basis points.
UK policy makers faced a tough decision between tackling inflation and avoiding adding to cost of living pressures on households and higher costs for businesses.
Martin McTague, national chair of the Federation of Small Businesses, said: “This move will mean higher debt costs for many firms at a moment when soaring overheads are threatening futures.
“The economic consequences of the pandemic are still being felt by small businesses, whose ability to make up for lost time and income has been undermined by a vicious cycle of rising costs.
“A lot of small firms have had no choice but to increase prices in response, but this isn’t always an option, especially in sectors still trying to entice customers back, such as hospitality and tourism, and their suppliers.
“At the same time, consumer confidence has plunged and the cost-of-living squeeze has intensified, with record fuel prices and sky-high utility bills meaning loss of disposable income.
“Small businesses increasingly feel that the Government is indifferent to the cost pressures they face.
“The planned hikes to national insurance and dividend taxation taking effect in a matter of days, alongside an income tax threshold freeze, will, for many, be the final straw.
“Next week’s Spring Statement is the Government’s last chance saloon to mend relations.
Suren Thiru, Head of Economics, at the British Chambers of Commerce, said: “The decision to increase interest rates, while expected, looks ill-timed against a backdrop of growing domestic and global headwinds, including Russia’s invasion of Ukraine.
“While interest rates remain low by historic standards, the latest rise will be viewed by many as a further step in a prolonged period of aggressive monetary tightening at a time when consumers and businesses are struggling under a myriad of rising cost pressures.
“Higher interest rates will do little to curb the global causes behind this inflationary surge and risk intensifying the headwinds facing the UK economy by damaging confidence and deepening the financial squeeze on consumers and businesses.
“Instead, the focus should be on using next week’s Spring Statement to tackle the escalating cost of doing business crisis by delaying the national insurance rise and introducing a temporary energy price cap for small businesses.
“This would give firms the headroom to keep a lid on prices, protect jobs and make investment that is so vital to sustaining our economic prospects.”
Alpesh Paleja, CBI lead economist, said: “With ongoing conflict in Ukraine pushing global commodity prices higher and exacerbating supply chain disruption, the MPC are clearly making moves to counter growing inflation.
“But they will be walking a tightrope in the months ahead, having to both keep price pressures in-check and manage the impact of tighter monetary policy on economic growth – particularly against a background of rising living costs.
“As households and businesses brace for further price rises, targeted support from government will be needed to cushion the blow until the outlook is on a firmer footing.
“By using the forthcoming Spring Statement to facilitate more investment-led growth – including through the introduction of a permanent investment – the Chancellor can push the UK onto a more ambitious growth trajectory.”
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