The Bank of England, the UK’s central bank, has raised interest rates for the 10th time in a row, hiking the base rate from 3.5 to 4 percent to help bring down double-digit inflation.
Seven members of the bank’s Monetary Policy Committee (MPC) voted for the rate hike, with two voting to keep it unchanged.
“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the MPC cautioned.
But it refrained from insisting it would respond “forcefully” to these pressures, as the committee has said in previous meetings.
The central bank predicted a recession of five consecutive quarters, from the current quarter to the first quarter of 2024, with gross domestic product (GDP) falling by 0.5 percent this year, a shorter and shallower drop than previously thought.
Inflation ‘Turned the Corner’
Bank of England governor Andrew Bailey said in a press conference after the rates decision that “we have seen the first signs that inflation has turned the corner.”He said: “Annual consumer price inflation has come down from 11.1 percent in October to 10.5 percent in December.
“That’s below where we thought it would be in November’s report and we think it will continue to fall this year and more rapidly in the second half of the year.
“This has a lot to do with energy prices. Last year’s very large increases are beginning to drop out of the annual calculation. Wholesale gas spot prices have fallen by around 50 percent since last November.”
Bailey said consumer prices index (CPI) inflation is expected to fall below the Bank’s 2 percent target rate in the spring of 2024, as long as energy prices fall as expected.
But he said that it is “too soon” to declare victory over inflation, as “inflationary pressures are still there.”
“The extent to which inflationary pressures ease will depend on the evolution of the economy and the impact of the significant increases in bank rate so far.”
‘Biggest Threat’
Chancellor of Exchequer Jeremy Hunt said he supports the Bank of England’s decision to raise interest rates.“Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the bank’s action today so we succeed in halving inflation this year,” he said.
“We will play our part by making sure government decisions are in lockstep with the bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
Prime Minister Rishi Sunak’s official spokesman said: “This is a difficult time for mortgage holders in the UK. As the chancellor has said, sound money and a stable economy are the best way to deliver lower mortgage rates and keep down the costs of mortgage payments.
“That’s why we are taking the necessary and responsible action to halve inflation, reduce our debt, and get the economy growing.”
Opposition parties have blamed the Conservative government for the economic situation.
Labour’s shadow chancellor Rachel Reeves said the latest rate rise will add to the “Tory mortgage penalty” being paid by homeowners.
She said: “The reality is that under the Tories, growth is on the floor, families are worse off and we are stuck in the global slow lane. We do not have to continue on this path of managed decline when Britain has so much potential to grow and thrive.”
Liberal Democrat Leader Sir Ed Davey called the rate rise a “hammer blow” for families struggling with the soaring cost of living.
Businesses Warn Against Further Hikes
Business leaders have expressed concerns that interest rates may still increase further.David Bharier, head of research at the British Chambers of Commerce (BCC), said the Bank’s “hard-line approach” to inflation could have “serious side-effects.”
“Those impacted most by today’s decision will be mortgage holders and businesses reliant on debt to keep afloat after three years of economic shocks,” he said.
“With the bank expecting inflation to slow to around 4 percent by the end of the year, further rate rises could now simply add to the risk of a deeper recession, outweighing the benefits.”
Federation of Small Businesses (FSB) national chairman Martin McTague said: “Consumer spending is stuck in the doldrums with retail spending over the festive period anaemic at best.
“Increased mortgage and loan costs will further dampen people’s willingness and ability to open their purses, spelling further pain in the short term for consumer-facing industries, which will inevitably feed through to other sectors as the situation persists.”
He said the government must “promote a growth agenda” in the next budget, which is set to be unveiled in six weeks’ time.
