Interest rates hiked again as inflation bitesby
As the UK lurches ever closer to recession, and soaring inflation continues to squeeze households and businesses, the Bank of England has raised interest rates by 0.25% for the fifth consecutive time.
The highest inflation in 40 years has led the Bank of England (BoE) to hike interest rates to 1.25%, with inflation slated to hit 11% later this year and the threat of recession starting to become a looming reality.
In a split decision, the Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points, to 1.25%. Those in the minority preferred to increase Bank Rate by 0.5 percentage points, to 1.5%.
While today’s increase continues this trend, the MPC decision is less bullish than the 0.5% rise that many had speculated before the announcement.
The BoE’s hike in interest rates trails behind the Federal Reserve’s more aggressive 0.75% increase in the US interest rates yesterday, as they also attempt to suppress their own inflation pressures. This is the biggest hike from the Federal Reserve since 1994.
The last time the MPC increased interest rates in May was the highest level in 13 years.
The BoE’s original inflation target of 2% by the end of the year has slipped away. Weeks after the last interest rate announcement in May, inflation hit the 40-year high of 9%. The BoE said in May that inflation was going to creep higher to 10% by the end of the year, but they are now projecting it to rise to 11% in October, reflecting the higher projected household energy prices.
“The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the committee’s assessment of the economic outlook and inflationary pressures.”
The BoE said the committee is on guard for any “persistent inflationary pressures” and if necessary “will act forcefully in response”.
Inflation was surging before Russia invaded Ukraine, but since then global inflationary pressures have intensified and have led to a deterioration in UK growth. These pressures have not abated since the last MPC report, with supply chain disruption and the aftershocks of Covid still hampering the UK economy.
“Inflation’s overshoot of the 2% target mainly reflects previous large increases in global energy and other tradable goods prices. The former has been greatly exacerbated by the war in Ukraine,” said the BoE. These same challenges remain but the excess inflation can be attributed to other global events.
“There has also been a role for interactions with domestic factors, including the tight labour market and the pricing strategies of firms. Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.”
The MPC will meet and announce any changes to the base rate on 4 August.
Accountants back interest rate hike
Since the BoE has increased interest rates after each MPC meeting, the accounting profession has debated whether this is the right approach in managing the economic pressures the UK is facing.
When the base rate increased to 1% in May, the AccountingWEB community mostly backed the decision. Petestar1969 said, “About time too, but I agree with Rishi more needs to be done. No sensible economy should have a base rate below 2%.”
Ian McTernan wasn’t concerned that the rate was on the increase. “People have become used to very cheap money. It’s high time rates moved back to more sustainable levels.” He added that those criticising the increase “fail to consider the adverse impact on the exchange rate of not moving rates”.
Justin Bryant echoed this: “Interest rates have been far too low for far too long and that, as well as money printing and extreme government borrowing, is one of the main causes of high inflation and inflated asset prices. That in turn has caused wealth inequality to increase big time over the past 10 years.”
While accountants seem in favour of an increase, do you think the Bank of England should have been more assertive and followed the Federal Reserve’s lead and nudged the interest rate hike more than 0.25%?