ITV News Business and Economics Editor Joel Hills explains the significance of the Bank of England raising interest rates to tackle soaring prices
Interest rates have been hiked to 3.5% from 3% - the highest rise for more than 14 years as the Bank of England attempts to calm inflation.
The Bank warned further interest rate rises “may be required” to bring inflation back to its 2% target.
The Bank of England has said it now expects UK GDP to decline by 0.1% in the final quarter of 2022, which is 0.2 percentage points stronger than expected in last month’s report but would still show the UK entering a technical recession.
It added that household consumption has remained “weak” and it has seen the housing market “continue to soften”.
Chancellor Jeremy Hunt said: “High inflation, exacerbated by Putin’s war in Ukraine, continues to plague countries across the world, eating into people’s pay cheques and driving up food and energy prices.
“I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target.
“The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.”
The Monetary Policy Committee (MPC), which sets interest rates, said a “forceful” policy response was justified as the labour market remained tight across the month.
There are also signs that inflationary pressures could stick around for longer than thought, it said.
On Wednesday, the Office for National Statistics (ONS) revealed that inflation had reached 10.7% – slightly lower than expectations and a reduction from the 41-year high seen in October.
Most of the MPC’s nine members agreed that they would continue to vote for rate rises if the economy broadly continues to develop as the committee expected when it last met a month ago.
“The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank rate might be required for a sustainable return of inflation to target,” the Bank said.
Two members of MPC voted for interest rates to remain unchanged at 3% – going against the majority. “The real economy remained weak, as a result of falling real incomes and tighter financial controls,” they argued. “There were increasing signs that the downturn was starting to affect the labour market. But the lags in the effects of monetary policy meant that sizeable impacts from past rate increases were still to come through.” Therefore, the two – Swati Dhingra and Silvana Tenreyro – said rates as they stand now should be “more than sufficient to bring inflation back to target”. Another member – Catherine Mann – argued at the meeting for a 0.75 percentage point rise, to 3.75%. She said that, while inflation is easing, she saw evidence that rising prices and wages will keep putting pressure on inflation.
Labour’s Shadow Chancellor Rachel Reeves said: “Today’s rate hike is further evidence that the government have lost control of the economy, harming growth, and leaving millions of working people paying a Tory mortgage penalty for years to come.
“After 12 years of Tory failure and wasted opportunities, only Labour offers the leadership and plans to stabilise our economy and to get it growing, so we aren’t just surviving, but thriving again.”
The Liberal Democrats have said the Bank of England’s raising of interest rates means “yet more pain” for already-struggling households.
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