The Bank of England has continued in its crusade to suppress inflation and bring it back down to the 2% target by further tightening monetary policy with yet another base rate rise today. The BoE’s decision takes the base rate up from 3.5% to 4%.
The decision was taken after the Monetary Policy Committee (MPC) voted by a majority of 7-2 members to increase the base rate by 0.5%. Two members preferred to maintain Bank Rate at 3.5%.
While the base rate increased, the MPC said it is confident that inflation has peaked and its approach is the right route.
In its monetary policy summary, the committee said: “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.”
The BoE forecasted for the base rate to rise to around 4.5% in mid-2023 before falling to just over 3.25% in three years’ time.
Chancellor Jeremy Hunt welcomed the central bank’s interest rate decision. He said: “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.”
Striking a different tone to his predecessor’s perceived contentious relationship with the BoE, Hunt said the government’s decision will be made “in lockstep with the Bank’s approach. Hunt said that this includes “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”.
However, the rate rise has been met with criticism from the accountancy sector, which has highlighted the struggle small businesses are facing amidst the economic turmoil.
Glenn Collins, the head of technical and strategic engagement at ACCA UK, said the half point rate rise is “detrimental to the growth and successes of businesses, particularly SMEs. The ongoing economic turmoil and cost of living crisis is placing significant pressure on businesses and having a lack of clarity on how they can plan for the year ahead is concerning.”
The ACCA’s SME tracker shows that only 17% of SMEs are planning for growth this year – which Collins pointed out is a result of “a lack of growth initiatives a lack of focus on growth initiatives and the cutting of measures designed to support businesses in the face of rising interest rates, cost of living and energy bills”.
He added, “A further hike in interest rates will only exacerbate this hesitant sentiment of SMEs which is a cause for great economic concern.”
The base rate rise comes as inflation remains at a near 40-year high of 10.5% and businesses are creaking under the cost of living crisis, rising energy bills and requests for increased staff wages.
“UK domestic inflationary pressures have been firmer than expected. Both private sector regular pay growth and services CPI inflation have been notably higher than forecast in the November Monetary Policy Report,” the committee added, although it sees positive signs. “The labour market remains tight by historical standards, although it has started to loosen and some survey indicators of wage growth have eased, alongside a gradual decline in underlying output.”
Inflation remains a bugbear for the MPC. The BoE expects inflation to start falling over the next few months as energy prices drop and it is still keeping to reaching its 2% target in two years’ time. “Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices.
“However, the labour market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation,” noted the BoE in February’s summary.
The BoE’s chief economist Huw Pill repeated this message in early January but with the warning that there were still risks of “self-sustaining momentum” due to the demand for higher wages and high prices in response to the high rates of inflation.
The next interest rate announcement will be on 23 March.
Current economic outlook
Last month the insolvency service reported that company insolvencies in December was 32% higher than the previous year, while Begbies Traynor reported that 610,405 businesses across the UK are in “significant financial distress”.
Ahead of today’s announcement market analysts polled by Reuters predicted that the BoE’s monetary tightening will finally loosen in the middle of the year at 4.5%.
The tenth consecutive interest rate in a row follows the pre-Christmas increase of 0.5% to 3.5%
The BoE started increasing the base rate at the start of December 2021. Then the base rate was only 0.1%, and had, up until that point, remained at that level since the start of the Covid pandemic in 2020.
The central bank’s decision comes hot on the heels of the US federal reserve showing signs of shifting to a slower pace of monetary tightening after only raising the base rate to 0.25% yesterday following a string of 0.5% and 0.75% increases last year.