The Bank of England has responded to the bleak economic outlook, partly caused by the disastrous mini-Budget and surging inflation, by rolling out the largest interest rate rise since 1989, taking the base rate to the highest level since the financial crisis in November 2008.
As the government prepares the country for “eye-watering” tax rises and spending cuts in the Autumn Statement, the Bank of England (BoE) today showed that it was working in lockstep with the Treasury by increasing interests rates by 0.75% – the biggest rise in 33 years.
With inflation still stubbornly out of control, the Monetary Policy Committee (MPC) voted for the eighth consecutive time to increase rates and set the base rate at 3% – the highest level since November 2008.
The Central Bank’s decision follows the US Federal Reserve which yesterday took the same decision to raise interest rates by 0.75%.
The BoE’s increase is a little more assertive than September’s modest 0.5% interest rate rise, which was followed by the calamitous mini-Budget that led to a chaotic period with the pound plummeting against the dollar and the BoE intervening by buying up to £65bn of government bonds to restore market confidence.
Today’s 0.75% hike surpasses the 0.5% announced in both September and August. The base rate has gradually increased since the start of December 2021, when the base rate was 0.1%, where it had sat since March 2020 at the start of the Covid pandemic.
The last time the base rate was 3%, the UK was battling the global financial crisis and the BoE had to slash interest rates from 4.5% to 3% to protect a slumping housing market.
With inflation currently at 10.1%, the BoE is so far losing its battle against surging inflation and is far from its 2% target. But the BoE committed to suppressing inflation as one of its main priorities.
The threat of recession continues to be a factor for the central bank.
The 0.75% increase is in line with what some commentators were asking for. Paul Surtees at Capitalise was calling for a 0.75% increase before the announcement. He previously favoured a 1% increase before the Truss-Sunak changeover, but with the Autumn Statement now on 17 November, he said the BoE needed to show some restraint, raising rates into fiscal unknowns.
Since the BoE’s recent intervention, gilt rates have come down giving the BoE some breathing space. “It’s a little too early to assess the impact, but lending products are starting to come back to the market,” said Surtees. “However, we have seen a number of fixed rate products leave the market and switch to variable rates.”
On the other hand, chartered accountant Richard Murphy reacted to the rate rise by calling for the Bank of England to be “stopped in its tracks” from creating the “biggest recession in UK living memory”.
Steady Times Ahead?
Today’s announcement signals the start of a steadier period for the BoE following a lot of political intrigue before this increase, as the base rate became a hot topic in the ongoing Westminster drama that followed the mini-Budget.
The ex-Chancellor Kwasi Kwarteng even eventually bowed to the pressure from the Treasury Select Committee and moved the original date of the medium-term fiscal plan to 31 October to provide clarity around the fiscal plans and access to the Office of Budget Responsibility’s fiscal forecasts.
Mel Stride, the then chair of the Treasury Select Committee, said bringing forward the fiscal announcement before the interest rate announcement was important because the MPC would be taking “a critical decision around the level of base rate which will, in turn, have significant implications for the economy and for millions of people and businesses across the UK.”
However, a change of prime minister and Chancellor and overtures of the government being more prudent at the upgraded Autumn Statement has since stabilised the market.
As Nicholas Hyett from Wealth Club said: “The overall economic picture is probably better now than it was a month ago.” This may mean the Bank can “ease its foot off the gas going forwards – with rates rising slower and ending lower than we might have thought even a few weeks ago,” he added.
“It helps that the government and Bank are now pulling in the right direction. The Bank raises rates to curb inflation, by discouraging people from spending money. Rishi Sunak’s plans to raise taxes and cut public spending have the same effect. The recent stability in sterling reduces the need to hike rates to defend the currency too.”