Interest rates hiked to highest level in 13 yearsby
Against the backdrop of surging inflation and the threat of recession, the Bank of England has increased interest rates for the fourth consecutive time.
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 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.”
Interest rate rises should be cancelled, and those that have already happened should be reversed. After all, interest rate rises put up the price of money, and that’s inflationary, so increasing them has to be the wrong policy now.
— Richard Murphy (@RichardJMurphy) May 4, 2022
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%.