Bank of England Raises Interest Rates to 1.75%

The Bank of England’s Monetary Policy Committee (MPC) has confirmed as widely expected that interest rates will rise by 0.5% to 1.75%, in what is the biggest single rate rise since 1995.

It also warned that the UK is likely to fall into recession this year.

The members of the MPC voted overwhelmingly in favour of the 0.5% rise by 8-1, with only one member favouring a more moderate 0.25% rise in rates.

It is the UK’s sixth consecutive rate rise since last year’s low rate of 0.10%.

Inflationary pressures have predictably been the catalyst for the rate increase, with UK CPI inflation currently pegged at 9.4%, and the MPC now expect it to accelerate to a peak of just over 13% in the fourth quarter of this year.

The new 1.75% rate reflects the doubling of wholesale gas prices since May, owing to Russia’s determination to weaponize its gas supplies to Europe, which is feeding through to retail energy bills hugely affecting consumer spending.

It is also anticipated that inflation will remain at similarly elevated levels next year, especially as the UK price cap for energy prices is set to spiral upwards by 70% in October, leaving potential annual fuel bills of around £3,500 per year.

Overall, the MPC hope that the latest decision will lead to a return to the Bank of England’s 2% inflation target in the medium term, but there still could be further interest rate increases forthcoming if deemed necessary to effectively combat the menace of inflation.

Bank of England Seeks to be Strong

The Bank of England has promised to continue to act forcefully, a recent mantra of the bank, going forward.

The way this will be achieved is buy using a more predictive forward guidance framework, to make the big decisions if the evidence justifies action.

More positively, the Bank of England is looking at the external environment, and notwithstanding the evidence of the slowing in demand in the economy, businesses it said are setting prices to recover costs in which consumers have shown resistance to so far.

The narrow path between monetary policy and growth that has been supported by the Bank of England will continue, yet it admits there has been trade-off shocks effecting inflation and growth

Previously non-energy and core goods prices were shocked by the pandemic, although the scale of the shocks set off by the Ukraine war have been deeper.

The scale of the current problems with energy prices are comparable with the global energy price crises of the 1970s.

As for monetary policy, the tradeoff is to ensure that the shocks do not persist in prolonging the inflationary pressures two or three years from now.

In the aftermath of the rate announcement the GBP/USD currency pair has fallen by 0.47% to $1.20, while the EUR/GBP currency cross has risen by 0.58% to €1.19.

The latest jump in UK interest rates, is also the biggest single hike since the Bank of England was granted independence by Tony Blair’s Labour government in 1997.

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