On Thursday 2nd February 2022, 12pm, the Bank of England once again increased the interest rate from 3.5% to 4% which is the 10th successive increase.
The increased rate is the highest since 2008 leaving mortgage payers in a state of limbo and continue to count the cost as the BoE struggle to contain inflation as the shift will add £50 to the average mortgage payment.
However there is talk about the end of the cycle of increased rates with the Monetary Policy Committee (MPC) tries to balance the slowing economy against the threat of spiraling prices.
In a summary of today’s decision, the Bank says:
‘Global consumer price inflation remains high, although it is likely to have peaked across many advanced economies, including in the United Kingdom.
Wholesale gas prices have fallen recently and global supply chain disruption appears to have eased amid a slowing in global demand. Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.’
So why have the Bank raise the interest rates today? The minutes of the BoE meeting showed that most policy makers on the MPC were concerned that wages and prices in the UK could keep climbing.
They say:
‘Seven members judged that a 0.5 percentage point increase in Bank Rate, to 4%, was warranted at this meeting.
Economic activity had weakened, but there had been some signs of greater resilience in the most recent data. Headline CPI inflation had begun to edge back and was likely to fall sharply over the rest of the year, as a result of past developments in energy and other goods prices. However, the labour market had remained tight and domestic price and wage pressures had been stronger than expected, suggesting risks of greater persistence in underlying inflation.
Measures of inflation expectations were still at elevated levels. The risks to the inflation outlook in the medium term were both large and asymmetric, with a skew towards greater persistence. This warranted additional weight being put on recent strength in the labour market and inflation data, and relatively less on the medium-term projections. A 0.5 percentage point increase in Bank Rate at this meeting would address the risk that domestic wage and price pressures remained elevated even as external cost pressures waned.’
Arguments against a 10th increase in the UK pointed out that the real economy remained week as a result of falling real incomes and the tightening of financial conditions over the past year.
UK chancellor Jeremy Hunt says the government supports the Bank of England’s decision to lift UK interest rates by half a percentage point to 4%. Hunt says the rate rise will help bring inflation down:
“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.
“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.”
UK inflation was 10.5% in December, over five times above the BoE’s target of 2%.
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