The Bank of England has raised interest rates from 0.5 per cent to 0.75 per cent, its third hike in four months.
The decision comes as the Bank tries to cool rising food and energy prices, which are putting strain on the finances of UK households.
Inflation stands at 5.5 per cent since January, the fastest rate of increase seen in 30 years. The percentage is also above the Bank’s two per cent target, and it is expected to reach eight per cent or higher in the months ahead.
The latest increase also sees interest rates reach their highest level since the Covid-19 pandemic lockdowns began in the UK, in March 2020.
There are concerns that the situation could intensify before it improves, with the energy price cap to go up from April and suggestions that the war in Ukraine could inflate prices further.
The Bank of England’s Monetary Policy Committee said: “The economy had recently been subject to a succession of very large shocks. Russia's invasion of Ukraine was another such shock.”
Commenting further on the decision to raise interest rates, the committee said that “given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist,” an interest rate rise was the appropriate course of action. The decision was passed with an eight-to-one majority.
The committee added that further interest rate hikes “might be appropriate in coming months, but there were risks on both sides of that judgement depending on how medium-term prospects evolved.”
The Bank does, however, expect inflation to “fall back materially” when prices stop increasing and the effects of inflation on household incomes begin to take full effect and consumer spending reduces.
The Unite trade union has criticised the Bank’s decision, saying that it will “put even more pressure on household finances as inflation and energy bills continue to skyrocket.”
Indeed, UK Finance has said that around two million households across the country will see an immediate rise in their mortgage repayments as a direct impact of the rates increase.
Suren Thiru, the economics chief at the British Chambers of Commerce, has called on chancellor Rishi Sunak to delay April's planned National Insurance increase and bring in a temporary energy price cap for firms in a bid to ease the “cost of doing business crisis”. Sunak is due to deliver his Spring Statement on March 23.
Thiru said that such a move by the chancellor would give businesses “the headroom to keep a lid on prices, protect jobs and make investment that is so vital to sustaining our economic prospects.”
Photo by Robert Bye on Unsplash
