Bank of England raises interest rate to 14-year high

The Bank of England has signalled it could continue to increase interest rates over coming months, as it raised its base rate to a fresh 14-year high.

Decision-makers said on Thursday they were increasing interest rates from 3 per cent to 3.5 per cent, despite inflation easing last month.

It is a slowdown from the last rise in November when rates were increased by 0.75 percentage points, and in line with what economists had forecast.

Rates have been raised in every meeting since late last year as the Bank tries to get inflation under control.

The Bank of England hikes interest rates for a ninth time in a row to a 14-year high of 3.5%, pressing ahead with efforts to tame inflation

The Monetary Policy Committee (MPC), which sets interest rates, said a “forceful” policy response was justified as the labour market remained tight across the month.

There are also signs that inflationary pressures could stick around for longer than thought, it said.

Most of the MPC’s nine members agreed they would continue to vote for rate rises if the economy broadly continues to develop as the committee expected when it last met a month ago.

“The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank rate might be required for a sustainable return of inflation to target,” the Bank said.

On Wednesday, the Office for National Statistics (ONS) revealed inflation had reached 10.7 per cent – slightly lower than expectations and a reduction from the 41-year high seen in October.

The MPC is tasked with trying to get inflation under control, to 2 per cent if possible.

The Bank also said the economy is now expected to do better in the final three months of 2022 than it had previously thought. Gross domestic product (GDP) is forecast to fall by 0.1 per cent in the fourth quarter, compared with the previous forecast of a 0.3 per cent drop.

But two members of MPC voted for interest rates to remain unchanged at 3 per cent – going against the majority.

“The real economy remained weak, as a result of falling real incomes and tighter financial controls,” they argued.

“There were increasing signs that the downturn was starting to affect the labour market. But the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through.”

Therefore, the two – Swati Dhingra and Silvana Tenreyro – said rates as they stand now should be “more than sufficient to bring inflation back to target”.

Another member – Catherine Mann – argued at the meeting for a 0.75 percentage point rise, to 3.75 per cent.

She said that, while inflation is easing, she saw evidence that rising prices and wages will keep putting pressure on inflation.