Its monetary policy committee yesterday increased interest rates from 0.75 per cent to a 13 year record of one per cent, marking the fourth consecutive hike since December as part of efforts to stem the pace of rising prices.
The latest rate rise means that hundreds of thousands of homeowners across Scotland already facing crippling price increases will see an immediate spike in their mortgage repayments.Those on standard variable rate (SVR) mortgages expected to pay around £16 more a month. Other forms of credit, such as bank and car loans, could also shoot up.
A minority of the bank’s committee pushed for an even sharper hike, as the bank warned the economy is on track to shrink later this year amid unprecedented pressure on household incomes.
In its first forecast since the Russian invasion of Ukraine, the bank warned that inflation, as measured by the consumer price index, looks set to rise to 10.25 per cent towards the end of this year - nearly double its previous forecast of 5.75 per cent.
However, some experts warned that the move to raise interest rates would do little to help an economy which already appears to be slowing down, and is facing pressures that are global in nature.
Economist David Blanchflower, a former member of the bank’s committee, described the decision as a “major error” and “exactly the opposite of what is needed.”
“The UK economy is about to tank due to the utterly incompetent committee” he said. “The only issue is when, not if, its members will have to go into reverse gear.”
It comes as calls for a windfall tax on energy companies to help households struggling in the face of surging utility bills and tax increases intensified yesterday after Shell reported its highest ever quarterly profits of £7.3 billion.
The bank’s announcement, which came as voters across the country headed to the polls, offers an unvarnished assessment of the challenges facing families and the wider economy in the months and years ahead.
Six members of its nine-strong committee voted for the 0.25 per cent increase in interest rates, although the remaining three had called for a 0.5 per cent hike due to worries over rocketing inflation.
In a bleak set of forecasts, the bank predicts growth will contract in the final three months of 2022 as the cost squeeze sees households rein in their spending.
While the UK looks set to narrowly miss a technical recession - defined by two quarters in a row of falling gross domestic product (GDP) - the bank forecasts very weak quarterly growth in 2023 and a contraction as a whole next year, with GDP falling by 0.25 per cent and unemployment picking up sharply as cost pressures hit hard.
The bank also slashed its growth outlook for 2024 to 0.25 per cent from the one per cent it predicted in February.
It means that households will face one of the most significant hits to their take-home pay since records began in 1964. Real income, the value of earnings after adjusting for the impact of inflation, is set to fall by 1.75 per cent this year, according to the bank’s latest projections
Andrew Bailey, the Bank of England’s governor, said: “I recognise the hardship this will cause for many people in the UK, particularly those on the lowest incomes, often with little or no savings, who are hit hardest by increases in the prices of basic necessities like food and energy.”
He said the bank’s response has been “thought over a lot,” and pointed out that some wanted it to increase interest rates even further, which it had rejected.
Describing the situation facing the economy as a “very sharp slowdown,” Mr Bailey added that the “biggest driver” of financial “pain” facing households was not monetary policy, but the “shock to real income.”
“Barring one year, it’s the largest since records began, and that is why we’ve been quite careful therefore about calibrating what the appropriate response of monetary policy should be,” he explained.
Mr Bailey also called on firms to consider the "hardship" being faced by many on low incomes amid the cost of living crisis when setting pay for top bosses.
He said companies need to "bear in mind" the struggles that will be felt by many Britons, with the poorest set to be hit hardest by soaring bills.
The bank’s latest accounts show that Mr Bailey has a basic salary of £476,000, with his total remuneration for 2020/21 in excess of £575,000.
In minutes detailing the committee’s latest decision, the bank said further rate hikes will likely be needed to cool rampant inflation.
It said: "The UK economy had recently been subject to a succession of very large shocks and disturbances. Russia's invasion of Ukraine was another such shock."
Most of the bank's policy makers believe "some degree of further tightening in monetary policy might still be appropriate in the coming months,” it went on.
But critics of the interest rate rise were damning in their condemnation of the bank’s thinking.
Mr Blanchflower, who was an external member of its monetary policy committee between 2006 and 2009, said the UK was “quite clearly already in recession,” and argued that rate cuts were needed.
“The committee is representing the interests of the Square Mile and its banker friends, who like higher rates, not those of the woman waiting for a bus on the Mile End Road, which starts a mile from Aldgate,” he hit out.
Suren Thiry, head of economics at the British Chambers of Commerce, cautioned that the bank’s decision risks doing more harm than good.
“The decision to raise interest rates will cause considerable alarm among households and businesses given the rapidly deteriorating economic outlook and mounting cost pressures many are facing,” he said.
“The Bank of England face an unenviable trade-off between soaring inflation and a wilting economy. However, higher interest rates will do little to address the global headwinds and supply constraints driving this inflationary surge.
“It also raises the risk of recession by damaging confidence and intensifying the financial squeeze on businesses and consumers.”
Paul Dales, chief UK economist at Capital Economics, said he believed interest rates could hit as high as three per cent by next year, driven by domestic price pressures resulting from a tight labour market and wage expectations.
The bank’s forecast states that financial markets are expecting the interest rate to be "just over" 2.5 per cent come mid-2023.