Interest rates jump as Bank of England battles inflation
Interest rates have been increased for the seventh time in less than a year, with the Bank of England raising rates by 0.5% to 2.25%.
The increase, which was widely expected, means interest rates are at its highest level since 2008. This will put further pressure on millions of homeowners who will see mortgage repayments increase alongside fast-rising energy and food costs.
The Bank of England’s Monetary Policy Committee (MPC) has a 2% target for inflation but in August consumer prices were up 9.9%. It voted 5-4 for the 0.5% rise – with three members voting for a 0.75% rise, with one favouring 0.25%.
The MPC expects the impact of the Energy Price Guarantee to mean the peak in inflation is “now likely to be lower than projected in August” and be just under 11% in October.
It said: “Nevertheless, energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back.”
The Bank is also concerned that household spending is likely to be “less weak” because of the Guarantee, which it believes will “add to inflationary pressures in the medium term” and justifies the latest interest rate rise.
Sterling has “depreciated materially”, the Bank said, acknowledging that the pound-dollar exchange rate is at its lowest level since 1985 – another factor in rising inflation as imports get more expensive.
Chancellor Kwasi Kwarteng will present his mini-Budget tomorrow that will be see as a key indicator in how the new Government intends to tackle the cost of living crisis and wider economic pressures. It is expected to include tax cuts totalling £30bn, including getting rid of the planned increases in national insurance and corporation tax.
Interest rates were at an all-time low of 0.1% for 21 months from March 2020, when they were cut ahead of the start of the first Covid-19 lockdown, after a decade of historically-low rates. The last year has seen increases start to return the rate to more normal levels and market analysts are forecasting further rises to above 4% next year.
The MPC will next meet on November 3.