The Bank of England has raised interest rates by 0.5 percentage points to 2.25% in an attempt to combat soaring inflation amid the cost of living crisis.
It’s the seventh consecutive increase in the bank rate in a row, but a smaller rise than many economics analysts had expected. The decision by the Bank’s monetary policy committee (MPC) takes rates to the highest level since 2008.
Kitty Ussher, chief economist of the Institute of Directors, pointed out that reason why rates have risen less than in some countries was that some indicators suggest the vacancies in the job market were beginning to stabilise. She said: “Many of our members think that the peak will come next year, and so may price accordingly, running the risk that inflationary expectations become self-fulfilling.
“However, the MPC also pointed to recent data showing the UK economy flatlining over the summer, and early signs that labour vacancies may have peaked. This explains why most MPC members chose to raise rates at the lower end of market expectations rather than follow the US and eurozone and go for a higher 0.75 percentage point rise.
“The key question for the months ahead is whether inflation can be tamed without entering recession. With a government determined to go for growth in a rising interest rate environment, that’s still all to play for.”
Retention & cost of living
The TUC’s head of economics Kate Bell said employees would bear the brunt of the interest rise. She said: “The rate rise will increase the pressure on families. The government must respond in the mini budget with action to get pay rising faster and to protect jobs from a recession that we may already be in.
“The chancellor can’t do that with bungs to bankers and big business. He must get pay growing by increasing the minimum wage and giving public service staff a proper pay rise that keeps up with prices. And ministers should give all working people the rights they need to bargain for higher pay across the economy.”
Charlie Huggins, head of equities, at investment service for wealthy people, the Wealth Club, pointed to the UK being between a “rock and a hard place”. He said: “The MPC will feel its hand was forced. The new Tory government is opening the fiscal taps, while on the other side of the pond, the Federal Reserve is tightening the monetary screws. Both factors have compounded pressure on sterling, which is trading at its weakest level against the dollar since 1985. A weak currency only fans the flames of inflation, given the UK’s reliance on imports.
“The Bank of England is stuck between a rock and a hard place. A gentler approach to rate rises risks sending sterling into a tailspin, and seeing inflation get even further out of control. But too much tightening could easily choke the life out of the economy, without significantly easing the cost-of-living crisis. It’s a horrible balancing act, with seemingly no good outcomes.”
Labour shadow chancellor Rachel Reeves accused the government of losing their grip on the nation’s finances. “This Tory government has lost control of the economy,” she said. “By putting such huge unfunded and uncosted sums on borrowing they’re pushing up mortgage costs for everyone.
“Their reckless approach is an immense risk to family finances.”