Bank of England raises interest rates to 0.75% as inflation soars

Threadneedle Street reacts to prospect of Ukraine war pushing UK inflation peak to 10%

The Bank of England has responded to the likelihood that the war in Ukraine will push inflation to around 10% this year by raising interest rates back to the pre-pandemic level of 0.75%.

Threadneedle Street’s monetary policy committee (MPC) voted 8-1 to increase borrowing costs by 0.25 percentage points – the first time the Bank has raised rates at three successive meetings in more than two decades.

The Bank said Russia’s invasion had forced it to rethink its forecast for the peak of inflation this year and it was now expected to be “several percentage points” higher than the 7.25% it had previously forecast.

There had been speculation before the meeting that some MPC members might opt for a half-point increase, but only one – Jon Cunliffe – dissented from the majority by voting to keep interest rates on hold.

The other eight MPC members decided fresh action was needed to return inflation – currently at a three-decade high of 5.5% – to the government’s 2% target. They stressed the tightness of the labour market and upward pressures on costs and prices.

Minutes of the meeting are likely to stoke fears that the economy is heading for a period of stagflation – weak growth and strong upward price pressures.

“Developments since the February report are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes,” the Bank said.

“Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the UK, is likely to slow.”

The Bank said growth in January had been stronger than expected but consumer confidence was being hit by falling living standards. “That impact on real aggregate income is now likely to be materially larger than implied in the February report, consistent with a weaker outlook for growth and employment, all else equal.”

Despite strong inflationary pressure, the Bank adopted a less aggressive tone about future rate increases than the US Federal Reserve, which is pencilling in a further six increases in borrowing costs this year. The MPC said a further “modest” tightening of policy could be needed over the coming months, depending on the medium-term outlook for inflation.

The Bank thinks the annual inflation rate will rise to around 8% in the second quarter of 2022, and perhaps even higher later this year.

There was a risk that, if sustained, rising energy prices would lead the UK energy regulator Ofgem to push its price cap “substantially” higher in October.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

“This could temporarily push inflation around the end of this year above the level projected in April, which was previously expected to be the peak. Further out, inflation is expected to fall back materially, as energy prices stop rising and as the squeeze on real incomes and demand puts significant downward pressure on domestically generated inflation.”

The Bank said it could do nothing to prevent higher prices for energy and other commodities hitting living standards.

“The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock,” it said.

The Bank raised rates for the first time in December, from 0.1% to 0.25% and increased them further – to 0.5% in February.


Larry Elliott Economics editor

The GuardianTramp

Related Content

Article image
Bank of England raises interest rates as it warns of recession and 10% inflation
Rise to 1% is fourth successive increase and highest level since February 2009

Richard Partington Economics correspondent

05, May, 2022 @11:01 AM

Article image
UK inflation forecast to hit 8% in April amid cost of living crisis
CPI rises to 5.5% in January with further increase expected as soaring energy bills squeeze households

Phillip Inman

16, Feb, 2022 @5:42 PM

Article image
Bank of England raises interest rates to 1.25%
Bank warns of inflation rising to 11% after split vote to lift rate, for fifth time in a row, by 0.25 points

Richard Partington Economics correspondent

16, Jun, 2022 @11:37 AM

Article image
Bank of England policymaker says rates could rise again in May
Catherine Mann argues that soaring energy and food prices will persist even if consumer demand weakens

Phillip Inman

21, Apr, 2022 @4:51 PM

Article image
UK inflation eases to 10.7% as annual rate of price increases slows
Drop in consumer prices index had been forecast but costs continue to rise, adding to pressure on ministers to raise pay

Phillip Inman

14, Dec, 2022 @7:01 AM

Article image
Bank of England raises interest rates to 0.5%
Rise aims to combat soaring inflation despite faltering economic recovery and deepening cost of living crisis

Phillip Inman and Richard Partington

03, Feb, 2022 @1:14 PM

Article image
Recession: the price Britain will pay to control inflation
Analysis: As the Bank of England raises interest rates the message is clear – the 1970s are back

Larry Elliott Economics editor

05, May, 2022 @3:15 PM

Article image
UK inflation rise is worrying but Bank of England must not overreact
Analysis: Figure is being generated by factors outside Britain, and households and firms can do without burden of higher interest rates

Phillip Inman

20, Jul, 2022 @9:13 AM

Article image
Tesco chairman warns of food price inflation at 5% by spring
John Allan fears rate will rise quickly after big hike in energy costs filters through supply chain

Miles Brignall

06, Feb, 2022 @4:57 PM

Article image
UK inflation falls to 9.9% after drop in petrol prices
Unexpected dip in August is first easing of upward pressure on cost of living in almost a year

Larry Elliott Economics editor

14, Sep, 2022 @7:43 AM