The Bank of England pushes interest rates up by half a percentage point – the sixth rise since December and the biggest rise since 1995.
The bank’s Monetary Policy Committee voted 8-1 to increase the base rate to 1.75%, an attempt to prevent the inflationary impact of soaring energy prices being compounded by domestic price and wage pressures.
The interest rate increase will add around £650 to annual repayments for those with an average tracker mortgage. The increase in monthly tracker repayments for homeowners since rates began rising from a low of 0.1% last December is around £170.
The savage inflation rate, the highest since September 1980, is being driven by the rising cost of wholesale gas on international markets, which has doubled since May and is on course to treble domestic energy bills.
The bank believes that the domestic energy price cap will reach £3,500 per household in October, prompting inflation to peak at 13.3% in the fourth quarter of this year and remain above 10% until the middle of next year. It’s forecast to fall back marginally to 9.5% in the third quarter and 5.5% by the end of the 2023.
The domestic energy price cap is expected to increase again when regulator Ofgem reviews the figure in January, but the MPC believes the inflationary impact will be offset by falls in other areas. It says goods price inflation may have peaked, and commodity prices are already beginning to fall back.
Real living standards to fall, despite support for energy costs
Real living standards, even after the impact of direct government support for energy bills of at least £400 per-bill payer, are forecast to fall by 1.5% this year and 2.25% next year, with a 5% decline from peak to trough.
A five-quarter recession ending in the first quarter of 2024 would be comparable in length to the downturns of 2007-08, the early 1990s and the early 1980s, but would be shallower than the financial crisis with a peak-to-trough decline in GDP of 2.1%.
The bank’s Monetary Policy Committee said energy prices are responsible for the majority of the rise in inflation, with continued COVID supply chain disruption the other significant factor.
Explaining its reasoning for the rate increase, the minutes of an MPC meeting said: “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023 while consumption turns negative.
“The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.
“In view of these considerations, the committee voted to increase the Bank Rate by 0.5 percentage points, to 1.75%.”