Bank of England confirms highest interest rate rise since 1995

The bank has been increasing interest rates by 0.25% increments since December, but the MPC, which voted eight to one in favour of a 0.5% increase, believed - given the current inflationary pressures being seen in the UK - a “more forceful policy action” was justified.

Consumer Price Index (CPI) inflation reached 9.4% in June - up from 9.1% in May, and has risen sharply over recent months, making the June figure the highest annual rate since around 1982. 

These inflationary pressures, according to the Bank of England, largely reflect a near doubling of wholesale gas prices since May. It will exacerbate the fall in real incomes for UK households, and a further increase in UK CPI inflation in the near term. 

Responding to the rise, Money Advice Trust’s director of external affairs and partnerships Jane Tully said it will “add to the worries” of homeowners already struggling with soaring prices. 

She added: “October’s energy price rise is just around the corner and with inflation predicted to continue to increase into next year, there is little respite in sight for millions of people.

“With household budgets stretched from all directions, it is crucial that creditors treat people struggling to pay or already in difficulty fairly, including offering payment deferrals where appropriate and pausing collection activity.  

“And with the situation only set to get harder, it is more important than ever that people are able to easily access the help and advice they need.” 

StepChange’s director of external affairs Richard Lane added: “While higher interest rates may be needed to dampen down inflation, right now struggling households are having to cope with both. 

For many people, the overall cost burden simply isn’t sustainable, and with energy bills set to rise even further than previously expected, the pressure won’t be easing off any time soon. Affordability and debt are going to need to be top of the list for the next prime minister.” 

Based on its estimates, the bank expects CPI inflation to go from 9.4% in June to just over 13% in the final quarter of 2022 - with this to remain at very elevated levels throughout most of 2023, before falling to the two percent target two years ahead. 

In addition to this, GDP growth in the UK is slow with the latest rise in gas prices leading to another significant deterioration in the outlook for activity. It’s now also projecting the UK will enter a recession in the fourth quarter of this year, with real household post-tax income projected to fall sharply in 2022 and 2023 while consumption growth turns negative. 

Alongside this, domestic inflationary pressures are projected to remain strong over the first half of the bank’s forecast period, with firms generally reporting that they expect to increase their selling prices markedly. 

The bank does, however, expect inflationary pressures to dissipate over time with global commodity prices assumed to rise no further, while tradable goods price inflation is expected to fall back - the first signs of which may already be evident. 

And, although the labour maker may loosen only slowly in response to falling demand, unemployment is expected to rise from 2023. Domestic inflationary pressures are therefore expected to subside in the second half of the forecast period, as the increasing degree of economic slack and lower headline inflation will reduce the pressure on wage growth. 

The bank has said the risks around the MPC’s projections from both external and domestic factors are exceptionally large at present with there being a range of plausible paths for the economy, which have CPI inflation and medium-term activity significantly higher or lower than the baseline projections. 

As a result, in coming to its assessment of the outlook and its implications for monetary policy, the committee is currently putting less weight on the implications of any single set of conditioning assumptions and projections. 

Reflecting on these projections, Shane O’Neil - head of interest rates at investment fund advisor Validus Risk Management - said the Bank of England has become “significantly more pessimistic” about the state of the economy. 

He added: “Not just a technical recession but a drop in output of 2.1, the worst performance for the economy since the global financial crash should it come to pass. 

“Not done with shocks, the bank also predicted a peak inflation print of over 13% and to remain elevated through much of 2023 – meaning the cost of living squeeze isn’t going away any time soon.

Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50 basis-point hike and we have seen the pound fall more than 0.5% against the dollar and the euro immediately following the release.” 

O’Neil also said, with the “dreary predictions” from the MPC causing ongoing pain for the consumer, the focus will turn on politicians to act. He explained: “With Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade.”