Interest rates rise again as inflation stalls
With inflation remaining stubbornly high, the Bank of England’s Monetary Policy Committee has once again voted to increase interest rates.
The Bank of England has today increased interest rates by 0.5% to 3.5%, in a bid to curtail the worst of inflationary pressures and the cost of living crisis.
In another win for the more hawkish members of the committee, a vote split of 6-3 amongst the MPC deemed that raising the interest rate by 0.5 percentage points was the best course of action. Two members preferred to maintain the rate at 3%, whereas one member preferred to increase the rate by 0.75 percentage points to 3.75%.
The increase, while higher than many of the other interest rate hikes in recent months, did not reach the highs of November’s 0.75% rise, suggesting that the previous increase was more of an extraordinary shift rather than a new normal.
This ninth consecutive rate rise was coloured by the UK’s uncertain economic outlook, with the MPC citing the current cost of living crisis and ongoing inflation into 2023 as key drivers behind their decision.
"The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response," it said in its monetary policy summary.
The Bank now expects GDP to decline by 0.1% in the final quarter of 2022, 0.2 percentage points stronger than expected in the November report.
It added that should the economy evolve broadly in line with its November projections, further increases in interest rates may be required for a sustainable return of inflation to target.
Moving the needle
Leading up to the announcement, it was reported that the BoE’s inflation-busting strategies may be beginning to bear fruit, as the current rate of increase slid from 11.1% in October to 10.7% in November - the sharpest drop in over 16 months.
However, while the news that inflation may have hit a ceiling will come as a relief for the BoE, the current rate remains a far cry from the 2% target it has set.
And with the UK facing both the worst growth and outlook of any large economy, questions will likely be asked of BoE governor Andrew Bailey over whether today’s interest rate increase will be enough to curtail spiralling food and energy prices.
Reaction
The 0.5% increase was widely expected, however, some in the accounting community remained unconvinced that it was the right course of action.
Reacting to the news, Caroline Plumb, chief executive of accountancy firm of Gravita, called the hike “another blow to small businesses already struggling with high inflation, huge pressures on their workforce and the imminent rise in corporation tax”.
“It could push many companies already stretched to the limit into insolvency,” she added. “With the second anniversary of the first repayments on the Covid loans approaching, many of which are linked to the base rate, this further increase in rates comes at the worst possible time for small firms. By increasing the cost of servicing those loans, the Bank of England is piling the pressure on companies that have taken out record amounts of debt over the past two years.”
Plumb's comments come after the Insolvency Service revealed that the number of businesses closing their doors had risen yet again in the month of November.
Chancellor Jeremy Hunt conceded that "this is tough for people right now".
He added: "It is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target. The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery."
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Replies (18)
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please would some genius explain to me how food and energy inflation will be reduced by increasing the cost of borrowing. All this will do is make anyone who pays interest - directly or indirectly - poorer. Mortgage holders now, rent payers not much later. Inflation is now falling because utility increases are not as steep, nothing to do with the BoE decisions.
the stranglehold of outdated economic theory on our economy must cease before britain is truly broken. we need bottom-up growth not trickle down macroeonomics.
You didn't get the memo, did you? It's called the Great Reset. Klaus Schwab, Head of the World Economic Forum, wrote a book about it. It's when corporations end up owning practically everything and Western Society as we know it breaks down. By 2030 you will own nothing and be happy. That is the WEF prediction, not mine.
@athenasolutions
The core problem is that the idiots in charge have yet to comprehend that nearly 50% of UK GDP and a similar percentage of employment is generated by SMEs.
And SMEs in majority (circa 90%) are small - not medium.
Operating a Fiat Currency, as Britain does, has two essential twin control levers: Base Interest Rate and Money Supply.
Clearly, as a majority are struggling to survive as commodity prices soar, employers cannot afford to increase wages and salaries: to add the additional burden of increased debt service costs to 50% of UK's GDP generators can only be described as sheer idiocy.
We have to remember that each month when we hear the annual rate of inflation the rises for 11 of the 12 months are the same rises that were included in the previous annual inflation figure. So indeed inflation next month will certainly be well above the target 2% figure.
However it may be that currently prices are rising at a much slower rate than the annual rate indicates. This is simply maths. #justsaying
Trouble is that fundamental numeracy is not a common skill set found amongst journalists - or indeed large swathes of the population.
I can still remember the looks of incredulity, nearly 60 years ago, when our teacher pointed out that a car whose acceleration is slowly decreasing may nevertheless still be increasing it's speed.
Hugo, the car analogy is a bit like inflation: even if inflation reduces to 2% target in a year's time, it doesn't mean prices have reduced to where they were, it means the increase is still there, it's just the rate of increase is not as large as it was.
Is increased interest rates the answer to the current inflation problem? The level of wages has not caused it, neither has excessive purchasing power in the hands of consumers-this is imported inflation. Presumably the high interest rates are designed to keep the value of sterling high in order to reduce the cost of imports and thus resulting in simply a mathematical and illusory calculation for the BofE to claim that it has reduced inflation. I would suggest living with the current rate of inflation and keep interest rates low. Once the Ukraine war has been resolved normality will be resumed. The current state of affairs will do enormous damage to the economy and to its people
Yet another bubble world.
The pain will continue well into the new year.
Inflation balmed by world events yet they continue to put the boot in on the struggling masses be it individuals or the corporate world.
No mention at all of the over zealous QE which did not exactly help the current situation either (IMO)
Ivory towers.
Well at least HMRC are increasing their advisory expense rates (45p per mile/ £312 working from home/ £34.90 lorry driver overnight subsistence/ fixed deductions for uniforms etc.) in line with high inflation.
Oh no wait, hang on a minute...
It has always seemed to me that interest rates should have been increased years ago particularly to curb house price inflation which does nobody any good except the builders who certainly don't need help and, of course, the Government who benefit in many ways - higher incomes - higher income taxes, higher house prices - higher SDLT and CGT and ultimately IHT. So while us poor peasants have to pay more HMG gets more money to throw away whilst they pretend not to increase taxes. It is legalised theft and by all politicians because the other lot are no better - it was Gordon Brown who started the house price bonanza.
No-one seems to explain to Jo Public what things really mean - MTD for ITSA is the current example of an avalanche of misery waiting to happen.
But why hasn't HMG spelled out that the current inflation is largely due to the Ukraine war and whilst prices of goods probably won't drop when the war is over they will stabilise. Why aren't the strikers being told to shut up and put up with it until the war is over. They will get increases anyway and if they did have decent negotiators rather than the people they do have they would do much better.
They can always leave their jobs and work elsewhere as most of us would do if we were that unhappy. The net result of huge pay rises will be more taxes which hurts everyone so the 'I'm all right Jack' attitude is just thoughtless and stupid.
Not to mention the damage done to the economy and thus to everyone else's pay rise. A lot of jobs will be lost because of these strikes but they don't care it's not their job - trouble is it may well be theirs or their wives or families jobs. Sheer stupidity.
Where to start...
"Whilst prices of goods probably won't drop when the war is over they will stabilise." So, those people who have lost purchasing power and struggle to heat and eat, will continue to struggle. Great. 1/3 of children in poverty is something we should embrace?
"Why aren't the strikers being told to shut up and put up with it until the war is over." - see above - these price increases are baked in, according to you, so they will be no better off after the war is over (whenever that may be). Best answer has always been to subsidise home insulation and to promote green energy; air pumps will be pretty much mandatory in new homes from 2025 so why not retrofit? Cold damp homes cause illnesses and death which costs the NHS. We had an insulation programme which the Tories scrapped cos the energy companies complained.
"They can always leave their jobs and work elsewhere as most of us would do if we were that unhappy." - well the nurses have and are walking. Which is why there are tens of thousands of vacancies. Who is winning here?
"The net result of huge pay rises will be more taxes which hurts everyone" - doesn't have to. Depends who you tax and what you tax. We over-tax income and under-tax assets so the rich stay warm wellfed healthy and undertaxed while the poor get clobbered.
"sheer stupidity" - indeed.
Dear all - I am no genius (re first post) but the reason interest rates go up is to choke off the supply of money into the economy. It all goes back to what causes inflation in the first place. Too much money chasing too few goods. Remember all that quantitative easing, never mind the £400bn bunged to people to sit at home producing nothing during covid. Well , this is the result. So the BoE pushes up the cost of money - in effect creating a retraction in the economy - thereby reducing demand and prices begin to fall. The left love to keep bashing Margaret Thatcher for apparently trashing every insustry north of Birmingham - becuase of her policies which among other things pushed up interest rates to try and kill inflation, which she did. Yes it's damned painful but the alternative is far worse - inflation destroys everything. I was around in 1975 when they hit 25%. Believe me what the BoE is doing now is nothing.
The difference (as a few other responders have pointed out) is that inflation is not being caused by "too much money chasing too few goods".
It's caused by a dramatic reduction in the supply of gas, oil and food.
Surely the reduction in supply of gas, oil and food results in too much money chasing too few goods, particularly when so much money has been printed. The inflation problem was only exacerbated by the oil etc shortages, not created by it.
if the inflation problem was caused by the money problem, then we would have had significant inflation caused by the massive bung for QE - much earlier than now - which was £895 BILLION according to the BofE website.
Bear in mind that the majority of people who benefited from that cash were already asset-rich according to the BofE's own website.
They can increase the mortgage rate to 10% and it wont stop current inflation which is driven by extreme increases in essential costs.
This just hoover all that covid support money back from working people.
Is it not the case that the BoE are looking forward at wage inflation (too many not working and/or making unaffordable wage claims), rather than backwards at cost (supply side) inflation which may or may not have already peaked (too early to know with certainty yet).