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Interest rates hiked to highest level in 13 years

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Against the backdrop of surging inflation and the threat of recession, the Bank of England has increased interest rates for the fourth consecutive time.

5th May 2022
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This afternoon the Bank of England (BoE) Monetary Policy Committee (MPC) announced another 0.25% rise in interest rates. This decision takes the previously 0.75% rate to 1% –  the highest interest rate level since 2009. 

The MPC voted by a majority of 6-3 to increase Bank Rate. The members in the minority preferred to increase Bank Rate by 0.5% to 1.25%.

Inflation pressures have intensified

“Global inflationary pressures have intensified sharply following Russia’s invasion of Ukraine. This has led to a material deterioration in the outlook for world and UK growth. These developments have exacerbated greatly the combination of adverse supply shocks that the United Kingdom and other countries continue to face,” explained the MPC’s report. 

The BoE also expressed concern about further supply-chain disruption due to Russia’s invasion of Ukraine and Covid-19 developments in China.

The decision to raise interest rates is an attempt to curb the inflationary pressures hitting households and businesses, but the move has sparked fears that the UK is sharply heading for a recession. However, Rishi Sunak expects today’s hike to continue. According to the Times the Chancellor reportedly told the cabinet that he believes interest rates will rise to 2.5% over the next year.

Today’s increase rate rise is comparatively cautious compared to the Federal Reserve’s more bullish 0.5 increase in an attempt to bring down inflation in the US. 

Inflation problems

Inflation is still posing a problem for the BoE. The previous interest rate announcement in March was published before Russia’s invasion of Ukraine and even then the MPC expected GDP growth to slow due to the adverse impact of increased costs in global energy and other commodity prices, including food prices. 

The current 7% inflation rate is running away from the government target of 2%. With inflation expected to rise further over the remainder of the year, the BoE’s ambitions to reach the 2% target by the end of the week seem to be slipping away from them. The BoE expects inflation to hit over 9% in Q2 before averaging over 10% at its peak at the end of the year. 

The BoE explained today that “the strength of inflation relative to the 2% target mainly reflects previous large increases in global energy and tradable goods prices, the latter of which is due to the shift in global demand towards durable goods and to supply-chain disruptions.”

However, the MPC appeared confident that its policies will ensure inflationary pressures will dissipate. As external factors wane, the committee is currently forecasting for inflation to fall below 2% in two years and then 1.3% in three years. 

Now the bank rate has been increased to 1%, the MPC confirmed that it will consider beginning the process of selling government bonds. 

Accountants criticise the increase

The expected rise to interest rates has already come up against criticism. Richard Murphy, the director of Tax Research UK, wrote days before the announcement: “The only reason why the Bank of England should increase interest rates is to stop an economy overheating, which creates inflation. The UK economy is in its worst state since 2008, at least. We need rate cuts in that case, not interest rate rises.”

As the threat of recession seems inevitable, Murphy called on the BoE to cancel any interest rate rises and reverse those that have already happened. “Interest rate rises put up the price of money, and that’s inflationary, so increasing them has to be the wrong policy now.”

 

Labour peer Prem Sikka was equally critical of the interest rate increase. Earlier this week, the professor of accounting at the University of Sheffield argued that raising interest rates for the fourth consecutive time is the “wrong policy” because it “will deplete disposable income, intensify cost of living crisis, cause recession.” 

He said that the current inflation is “inflation caused by corporate profiteering not excessive household purchasing power”.

Paul Clifford from Azets pointed out that the rate rise may trigger tightening of “already hard-pressed discretionary spending from consumers”. The last 1% interest rate in February 2009 was during the recession caused by the financial crash, but Clifford said, “What we are seeing now is a completely different set of economic circumstances, far beyond what any of us could have imagined 13 years ago. However, many businesses are resilient and have benefitted from significant efficiencies made during the pandemic, meaning they are better placed to absorb inflationary pressures.”

Fourth consecutive rise

Today’s announcement marks the fourth consecutive session the MPC has nudged up interest rates. In February the MPC voted by a slim majority of 5–4 to push the rate up from 0.25% to 0.5% – this was the first back-to-back increase since 2004.  

The BoE followed this up in March with another incremental increase to 0.75%. 

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Replies (27)

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By JohnB
05th May 2022 12:12

How convenient to have the Ukraine war to blame.
Nothing to do with printing and dishing out free money for 2 years.

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Replying to JohnB:
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By Luke Spooner
05th May 2022 12:13

Couldn't agree more!

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Replying to JohnB:
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By AS44NG
11th May 2022 08:42

JohnB wrote:

How convenient to have the Ukraine war to blame.
Nothing to do with printing and dishing out free money for 2 years.

Are you talking about the UK or the EU?

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By davidfaram
05th May 2022 12:17

Bank of England (BoE) base rate should match inflation, or there's no incentive to save.
Borrowers are happy to keep things as they are, with lowest base rate ever.
That just keeps property prices high and locks first time buyers out of the housing market.
Something has to give - expect more base rate increases in the next few months.

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Replying to davidfaram:
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By Hugo Fair
05th May 2022 12:43

Quite.

Although this may be "the highest interest rate level since 2009" (or to be more accurate the highest that bank rate has been since then ... take a look at https://www.bsa.org.uk/BSA/files/5c/5c180498-5e52-4a41-b022-5821c25f3cbd... (and weep if your memory doesn't stretch back that far).

Starting in 1939 and showing rates all the way up to 2009, you'll see the 'typical' rate was 5% (with frequent peaks around 15%).
You'll also see a correlation between 'runaway' property prices and ludicrously low bank rates ... but that's another story.

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Replying to davidfaram:
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By Ian McTernan CTA
05th May 2022 13:06

That suggestion would be a recipe for disaster.

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Replying to davidfaram:
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By MCV71
05th May 2022 15:29

I've noticed in my area a lot of "for sale" signs are later followed by "to let". First time buyers stand no chance and a crash is long overdue

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By petestar1969
05th May 2022 12:18

About time too, but I agree with Rishi more needs to be done. No sensible economy should have a base rate below 2%.

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By philaccountant
05th May 2022 12:48

Raising interest rates to stop inflation caused by imported gas prices that we have no control over. Makes perfect sense.

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By petestar1969
05th May 2022 13:16

Nothing to do with 10+ years of QE, of course?

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Replying to philaccountant:
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By DMBAcc
05th May 2022 14:56

Phil, I agree - the irony is obviously lost on those in charge of our economy. This will put mortgage rates up and may I suppose reduce house prices? or at least they won't keep going up at the same rate?

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By Ian McTernan CTA
05th May 2022 13:05

Labour peer Prem Sikka said' the current inflation is “inflation caused by corporate profiteering not excessive household purchasing power”. And he's a Professor of Accountancy.....

With people like him teaching students it's little wonder graduates aren't highly valued any more.

Someone needs to point out why the current bout of inflation is happening which is sod all to do with 'corporate profiteering' (makes it sound like he thinks companies shouldn't make any profits) and much more to do with huge supply chain issues, Covid effects and now a small war in Europe which he might have not noticed, being hidden in his ivory tower being paid very well and stacking up a massive pension....

He's probably one of those in Labour advocating a 'windfall' tax on oil and gas companies like BP, who lost around 20bn last quarter, ignoring the fact those companies already pay higher taxes anyway.

Richard Murphy fails to explain where the additional taxes should then come from- should we borrow even more? The UK economy is in its worst state since 2008, at least- he says. Let's ignore unemployment being around 4% then and a tight labour market.

It's easy to criticise but much harder to come up with workable solutions. Does he have any?

1% rate isn't high, it's just that people have become used to very cheap money. It's high time rates moved back to more sustainable levels.

They also seem to fail to consider the adverse impact on the exchange rate of not moving rates.

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Replying to Ian McTernan CTA:
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By rememberscarborough
05th May 2022 13:15

This gentleman has always had his own agendas so best to take anything he says with a large pinch of salt. Mind you that can be said for most of the "experts" who are commenting on this change of interest rates. Most of the comments are political at best.

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By rememberscarborough
05th May 2022 13:11

When I look at my savings placing them in an account giving me 1% isn't going to make me rich so implying that interest rates of 1% is "hiked" leaves me thinking this headline is more for click bait rather than reality.

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By Justin Bryant
05th May 2022 14:16

What a load of guff. Interest rates have been far too low for far too long and that, as well as money printing and extreme Gvt borrowing, is one of the main causes of high inflation and inflated asset prices and that in turn has caused wealth inequality to increase big time over the past 10 years*.

*I could not believe how much my defined contribution global growth fund pension has gone up this year when I saw the latest statement yesterday. A 20% annual increase, all thanks to low interest rates.

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By carnmores
05th May 2022 14:23

Prem Sikka and Richard Murphy an unholy alliance if ever there was one ;-)

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By MCV71
05th May 2022 15:27

Going up to 1% isn't a hike. I'm sure many of us on here remember double-digit interest rates.

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By Mike Warburton
05th May 2022 16:21

Not for the first time Richard Murphy and Prem Sikka demonstrate their misunderstanding of the position. We have a clear demonstration of excess demand in the economy and a shortage of both staff and materials to boost supply. Just look at the adverts in every restaurant for staff. Shortages of new cars is driving up the price of second hand cars. That is what drives up inflation, not interest rates, quite the reverse.
Interest rates have been too low for far too long. The longer this inflation is left untreated the harder it is to contain. I also suggest that they take some time to read the wise words of a the expert economist Tim Congdon.
I also suggest they take more note of the late great Denis Turner, chief economist at HSBC, who said that getting a bit of inflation is like getting a little bit pregnant!
Mike

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Replying to Mike Warburton:
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By Hugo Fair
05th May 2022 18:52

Careful now, you're surely not suggesting that Denis Turner thought of pregnancy as a binary condition? :=)

Anyway, you're quite correct that higher interest rates only drive up inflation where the bulk of purchases are paid for via borrowing ... which is why we're now in this position (not just Rishi's largesse but all the Q.E. from Gordon Brown onwards).

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Replying to Hugo Fair:
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By Mike Warburton
06th May 2022 08:34

Thanks for the response.
Denis Turner was one of the best speakers I have ever heard. So well informed and entertaining. It is a tragedy they he died far too young. I invited him to speak at our seminars several times and met him by chance on holiday in Beer shortly before he died.
Mike

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By Justin Bryant
06th May 2022 10:51

Base rate increases to 1%. On the same day, BoE predict inflation to hit 10% later this year. Yet Aweb appear to think a measly 1% base rate (an order of magnitude lower than the above inflation rate) is the bigger or more relevant story. Go figure.

Oh look, unsurprisingly UK house prices are at another record high per my above asset inflation point.

https://www.bbc.co.uk/news/business-61337763

A 1% base rate obviously ain't gonna make any difference there.

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By justsotax
06th May 2022 12:15

one of the wealthiest economies in the world, and some seem to be advocating a return to the 'good' old days of high interest rates because they had to pay it.... what an odd 'progressive' society we live in......

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Replying to justsotax:
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By Hugo Fair
06th May 2022 12:52

"some seem to be advocating a return to the 'good' old days of high interest rates".

Really? Can you indicate who & where that has been advocated on this thread?

A warning to those (like you?) that have never experienced higher interest rates is a valid wake-up call to be prepared for far worse ... so that you may be able to take appropriate actions in advance.

Do you think it's likely that 1% will be the peak? And do you not think that 'cheap money' is the root cause of massively inflated house prices?

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Replying to Hugo Fair:
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By justsotax
10th May 2022 17:22

The problem isn't cheap money.....the problem is the businesses wishing to hand it out (see 2008). The bankers didn't pay the price for their bad practices, instead they were rewarded with government handouts and the greenlight to continue.....so the little people pay the price.

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Replying to justsotax:
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By Hugo Fair
10th May 2022 19:59

I see you ignored the opportunity to reply to:
"Can you indicate who & where (a return to the 'good' old days of high interest rates) has been advocated on this thread?"

But, although the causes of any economic change are never attributable to just one action, you're on your own if you believe there's not high correlation between cheap borrowing and rapid house price increases. And, of course, expensive borrowing leading to stagnation (or even negative equity) in the housing market.

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Replying to justsotax:
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By Justin Bryant
06th May 2022 14:18

Leaving aside inflation, inflated house prices are mainly caused by interest rates being too low for too long and that's caused the UK wealth divide to increase massively this past decade. For example, only if you have rich parents or a very high paid job can you now afford a nice detached house in London or the South East (30 years ago that was not the case). You are considering only the winners of low interest rates.

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By DJKL
09th May 2022 10:41

Whilst interest rates are one part of the house pricing situation, generous lending by banks imho is far more important than interest rates. If one observed what happened post 2008 ,when banks curtailed their previous lending practices, one got a sense of how much supply of lending rather than cost of borrowing drove prices.

And for those that think higher rates give the FTB a better chance, not sure, there are funds available in the marketplace which will start purchasing residential if prices drop and they can blow the FTB out of the market; right now we sit with a fair few £millions of property with no borrowings and £1.5m sitting in the bank, a fair treasury of latent purchasing power and there are lots like us, drop residential prices and we, like many other professional investors, will hoover up any cheaper property offerings to the detriment of the FTB and of course the available supply of properties into the market will also likely get further squeezed (up here it is already tight with far fewer say Rightmove listings than in years gone by)

The catch with economics is there are a lot of moving parts , not all timely, and not all thoroughly predictable. but what is clear is those with funds and access to funds prosper and those constrained , like FTBs, do not.

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