Bank hikes benchmark rate for the eighth successive time in battle to keep inflation under control
The Bank of England has increased interest rates by 0.75% to 3% bringing them to their highest level in 14 years.
In its
November Monetary Policy report, the Bank said that
inflation - which now stands at over 10% - is “too high” and that “raising interest rates is the best way we have to bring inflation down”.
The move is the biggest increase since Black Wednesday in September 1992 and will “mean increasingly crippling mortgage costs for many” and is “the continued legacy of the disastrous
mini-budget”,
tweeted ITV News’s UK editor Paul Brand.
Economists believe rates will rise again in December and next year. “Mortgage customers and those with credit cards and personal loans should brace themselves for a series of interest rate hikes over the coming months”, said
MoneyWeek.
Why are interest rates going up?
Put simply, higher interest rates make borrowing more expensive and encourage people to save. This reduces how much people spend, helping to push inflation down, said the Bank of England.
Therefore, if the Bank feels inflation is rising too quickly, it may try to limit it by raising the base rate, pushing up interest rates. The Bank is now predicting inflation will remain above 10% for the next two quarters and so has raised interest rates in an attempt to keep inflation under control. The bank noted that it expects inflation to then “fall sharply from the middle of next year” as “the price of energy is not expected to rise so rapidly”.
Increasing interest rates is one way the Bank can try to tackle inflation as it raises borrowing costs in the hope it will encourage people to borrow and spend less and save more. But households are likely to feel squeezed, including some mortgage holders.
Responding to the hike, the Chancellor of the Exchequer, Jeremy Hunt said that interest rates were rising across the world “as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine”.
But the short reign of Liz Truss has also played a part in the Bank’s decision. “Rising interest rates is a key pillar of Trussonomics,” wrote Kate Andrews, economics editor of
The Spectator. The chaos that followed her mini-budget has left her successor, Rishi Sunak, “countering the Truss premium” on rates, said
Politico. Meanwhile, said
The Independent, it has left the Bank of England trying to “beat back stubbornly high inflation” fuelled in part by her “disastrous economic policies” of Truss.
What goes into decision making?
The approach requires a delicate balancing act because it is also feared that raising rates too far, too fast, will further derail the UK economy. China and Russia are currently cutting their rates with a similar thought in mind.
Along with the interest rate rise, the Bank said the UK already in a recession that could last for the longest period of time since records began as it forecasts a “very challenging outlook”
However, “enormous uncertainty hangs over these forecasts”, said
Sky News’s economics editor Ed Conway. “On the one hand they are based on market expectations for interest rates which were unusually high, which makes the economic outlook seem gloomier than it might be in practice”, he added. “On the other hand, they do not incorporate any of the expected spending cuts and tax rises the Treasury is considering imposing at its autumn statement later on this month, which would worsen the outlook,” said Conway.
“Plenty of people” think that the Bank should “leave well alone” and allow the inflation squeeze to get on with the job of slowing the economy and, ultimately, “squeeze inflation out”, wrote David Smith in
The Times in June. “High inflation, on this view, will be the instrument of its own demise,” he added.
Writing on
The Conversation, Brian Blank, a finance scholar, said that inflation is so high in the US that bringing it down “may require the highest interest rates in decades”, which could “weaken the economy substantially”.
Therefore, he said, the US Federal Reserve is seeking a so-called “soft landing” which would slow inflation without causing a recession.