Seven members of the Bank of England's monetary policy committee (MPC) voted to increase the base interest rate from 3.5 per cent to 4 per cent, with two voting to keep it unchanged. However, the MPC also softened its language, removing a promise to act “forcefully” to return inflation to its target level of 2 per cent, compared with the current annual rate of about 10 per cent.
Chancellor Jeremy Hunt has said he supports the latest rise in interest rates by the central bank. “Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year,” he said.
Kevin Brown, savings specialist at Scottish Friendly, the Glasgow-based mutual, said: “The MPC’s decision today gives us little in the way of real surprises and meets expectations from the market. The big question is where we go from here. Inflation in the UK is looking particularly sticky compared to international peers. Interest rates have risen like a rocket in a matter of months and may fall like a feather as inflation lingers on in 2023.”
Bradley Post, chief executive of RIFT Tax Refunds, noted: “A further squeezing of borrowing costs will not help the cost-of-living crisis one jot. Together with the highest tax burden in decades the hard-working public could be forgiven for believing that the powers-that-be do not exactly have their back, so to speak.”
The Federation of Small Businesses (FSB) said firms would be hoping that the inflation peak has passed as the base rate increases for the tenth time in a row. National chairman Martin McTague said: “Small businesses are hoping against hope that today’s rise in the base rate will signal a turning point in the Bank of England’s battle to bring inflation under control. Small business cost increases have run considerably above the headline rate, and these must be brought down. That said, the higher rates announced today come with consequences. The last time the rate was higher was 2008, when inflation was running at around half its current level. With the rising prices of inputs of all kinds, most notably energy, having greatly restricted small businesses’ financial headroom, to then have the cost of debt go up too is a double blow.”
The Bank of England said that the UK is still headed for a recession, but stressed that the economic downturn could be shallower and shorter than previously expected. Peak-to-trough gross domestic product (GDP) is set to shrink to 1 per cent, from around 3 per cent in an earlier forecast. This is because wholesale energy prices have fallen significantly since the MPC produced its last forecast, in November, and inflation has begun to fall from its peak last year. The outlook for the labour market has also improved, the MPC noted.