The Bank of England, the UK’s central bank, has increased interest rates from 3 to 3.5 percent, a new 14-year high.
At its meeting ending on Dec. 14, the bank’s nine-strong Monetary Policy Committee (MPC) voted by a majority of 6–3 to increase the bank rate by 0.5 percentage points.
It is a slowdown from the last rise in November when rates were increased by 0.75 percentage points, and in line with what economists had forecast.
Rates have been raised in every meeting since late last year as the bank tries to get inflation under control.
Explaining its decision, the MPC said, “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.”
The central bank said it now expects the UK’s GDP to decline by 0.1 percent in the final quarter of 2022, 0.2 percentage points stronger than the MPC expected in November.
It said household consumption “remains weak,” most housing market indicators have “continued to soften,” and investment intentions have also weakened further.
The bank signalled it could continue to increase interest rates over the coming months.
The MPC said that the majority of its members judge that “further increases in bank rate may be required for a sustainable return of inflation to target.”
Dissenting Views
Three members of the MPC disagreed with the majority. Two of them—Swati Dhingra and Silvana Tenreyro—voted for interest rates to remain unchanged at 3 percent.“The real economy remained weak, as a result of falling real incomes and tighter financial controls,” they argued.
“There were increasing signs that the downturn was starting to affect the labour market. But the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through.”
Therefore, they said rates as they stand now should be “more than sufficient to bring inflation back to target.”
Another member—Catherine Mann—argued at the meeting for a 0.75 percentage point rise, to 3.75 percent.
She said that, while inflation is easing, she saw evidence that rising prices and wages will keep putting pressure on inflation.
The MPC is tasked with trying to get inflation under control, to 2 percent if possible.
According to the Office for National Statistics, the UK’s Consumer Prices Index inflation rate fell to 10.7 percent in November.
It marks a welcome drop from the eye-watering 11.1 percent seen in October, when soaring energy bills sent inflation to its highest level since October 1981, but the figure remains high by recent standards.
‘The Sooner We Grip Inflation the Better’
Commenting on the latest rate rise, Chancellor of the Exchequer Jeremy Hunt said: “High inflation, exacerbated by [Russian President Vladimir] Putin’s war in Ukraine, continues to plague countries across the world, eating into people’s pay cheques, and driving up food and energy prices.“I know this is tough for people right now, but 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.”
Opposition parties blamed the current economic difficulties on the Conservative government.
Labour’s shadow chancellor Rachel Reeves said: “Today’s rate hike is further evidence that the government have lost control of the economy, harming growth, and leaving millions of working people paying a Tory mortgage penalty for years to come.
“After 12 years of Tory failure and wasted opportunities, only Labour offers the leadership and plans to stabilise our economy and to get it growing, so we aren’t just surviving, but thriving again.”
The Liberal Democrats said the rate rise means “yet more pain” for already-struggling households.
Lib Dem Treasury spokesperson Sarah Olney said: “This is the nightmare before Christmas for families already struggling with the cost-of-living crisis.
“This government’s complete and utter failure to control inflation and their disastrous mini-budget have led to mortgage payments soaring at the worst possible time of year. With so many not coping with high energy bills, this latest rate rise is yet more pain.”
She reiterated the party’s call for the government to bring in a temporary ban on home repossessions, a mortgage rescue fund to support those hardest hit, and a ban on no-fault evictions for renters.
