Bank of England raises interest rates to 1%

Outlined by the Monetary Policy Committee’s quarterly Monetary Policy Report, it expects inflation to rise to around 10% this year. Prices are also likely to rise faster than income for many people. 

And, while the UK has been recovering from the effects of Covid, the increase in the cost of living will lead to slower growth overall. This predominantly reflects the significant negative impact of sharp rises in global energy and tradable goods prices on most consumers’ incomes and many companies’ profit margins. 

In addition to this, while the unemployment rate is likely to fall slightly further in the near term, it’s expected to rise to 5.5% in three years’ time given the sharp slowdown in demand growth. 

The move to raise interest rates is designed to return inflation to the Bank of England’s two percent inflation target. It expects inflation to begin to fall next year as it doesn’t expect the causes of the current high rate of inflation to persist, getting close to its two percent target in around two years.  

Responding to the rate rise, the Money Advice Trust’s chief executive Joanna Elson said the rate rise, while small in scale, is a “potential source of worry with significant amounts of borrowing”, when taken in the “context of rising costs across the board”. 

She added: “Whilst the ongoing impact of higher inflation is likely to be felt much more strongly, we know that any small increase in costs can push households with stretched budgets into difficulty.

“It is important that any increases in the cost of borrowing are not passed on to the many households already struggling to cover essential costs. With no let-up in sight from rising energy, fuel and food prices, more support is needed now for the many households already caught at the sharp end of the cost of living crisis. 

“Significantly uprating benefits would go a long way in helping people whose incomes are not keeping pace with rising costs, along with targeted support for those unable to afford their bills.”

StepChange’s director of external affairs Richard Lane, meanwhile called for more government support as what’s currently been offered "falls short" of what’s needed to mitigate the "double whammy" of rising inflation and interest rates the country now faces.

He added: "The treasury showed itself to be agile and reactive to the country’s financial challenges during the pandemic – it’s now time to display these same traits in response to a similarly dire situation.

"Measures including raising benefits to match current levels of inflation, furthering energy bill support, pausing deductions to benefits and halting debt enforcement and the use of bailiffs where households are vulnerable and unable to pay, are all ways in which those on the lowest incomes can be helped to navigate the current crisis.”

As the Bank of England has raised interest rates to one percent, it has hit a self-imposed threshold to reveal its next steps in its plan to reduce billions of pounds worth of assets built up over 12 years of quantitative easing. 

Because of this, the Monetary Policy Committee will “consider beginning the process of selling UK government bonds held in the Asset Purchase Facility”. Recognising the benefits of “providing market participants with clarity on the framework for any potential sales programme”, it has asked bank staff to work on a strategy for UK government bond sales.