BoE lifts rates to 13-year high amid surging inflation

by | May 5, 2022

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The Bank of England hiked interest rates to 1% on Thursday – the highest level in 13 years – as it looks to tackle surging inflation.
The Monetary Policy Committee lifted the key Bank Rate from 0.75% in what was the fourth consecutive rate rise, with six of the nine members voting for a 25 basis points increase, while Jonathan Haskel, Catherine Mann and Michael Saunders were in favour of a 50 basis points hike.

It came as the Bank warned that inflation was set to hit 10% later this year and was likely to take around two years to return to its 2% target.

Consumer price inflation is expected to have reached 9% in April after the energy price cap was lifted and then peak slightly above 10% in the last quarter of the year after the price cap rises again in October.

The BoE also cut its GDP forecast for next year to a 0.25% contraction from a previous forecast for 1.25% growth. This caused sterling to slump and by 1250 BST it was down 1.8% against the dollar at 1.2399.

“As economies around the world opened up after Covid restrictions eased, people started to buy more goods,” the BoE said. “But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.

“Higher energy prices have also played a big role. Large increases in oil and gas prices have pushed up petrol prices and energy bills.

“Services inflation is picking up a little. Russia’s invasion of Ukraine has led to more increases in the prices of energy and food.

“We expect inflation to rise further to around 10% this year.

“Prices are likely to rise faster than income for many people. That means that people will be able to buy less with their money. The UK economy has been recovering from the effects of Covid, but we expect the increased cost of living to lead to slower growth overall.”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Withdrawing the pacifier of cheap money was never going to be easy, particularly with the economy at crawling place but the Bank of England has clearly judged that leaving rates low will do more harm than good even though it is set to tip the UK into a downturn.

“The last time rates were at 1% was in February 2009 as the repercussions of the global financial crisis were taking hold, and Lily Allen was at number 1 in the UK music charts with her aptly named track The Fear.

“Right now that mood music is back with policymakers at the Bank of England clearly sharing fears that unless action is taken now to lower demand in the economy, inflation will spiral out of control, which could cause even more pain for the economy.

“Already it’s predicting inflation will shoot up to a frightening 10% with a rise in the energy price cap set to cause more financial pain in the Autumn. With more interest rate rises expected alongside elevated commodity prices that are set to squeeze consumer and company spending power, this pincer movement is expected to lead to a contraction in economic output by 0.25% in 2023.

“The stage is set for a pretty bleak winter of discontent with the economy heading into reverse and little end in sight to rising prices given the ongoing toll the war in Ukraine is having on commodity markets. The oil price has marched up even higher today, with Brent settling above $110 dollars a barrel after the EU moved to ban most Russian crude imports.”

On Wednesday, the US Federal Reserve announced its biggest interest rate hike in more than 20 years. The Fed lifted its benchmark interest rate by half a percentage point to between 0.75% and 1%, with further rate increases expected after US inflation hit a fresh 40-year high of 8.5% in March.

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