Bank of England raises interest rates to 0.75%

Central bank expects inflation to hit about 8% in April and peak later in the year

The Bank of England has raised its key interest rate for the third time since December as it pushes ahead faster than other central banks to combat a global wave of inflation driven by soaring energy prices. AP

The Bank of England on Thursday raised its key interest rate for the third time since December as it strives to combat rising inflation, which is expected to hit 8 per cent in April as the conflict in Ukraine continues.

Eight out of nine members of the Monetary Policy Committee (MPC) voted to raise the main bank rate to 0.75 per cent from 0.5 per cent, with the move following the US Federal Reserve's decision to raise borrowing costs for the first time since the Covid-19 pandemic.

The lender said inflation was likely to hit about 8 per cent in April – almost a percentage point higher than it forecast last month – with warnings it could peak even higher later in the year, worsening the cost-of-living crisis for Britons already grappling with higher energy and food bills.

But the BoE softened its language around future rate increases as it assessed the full impact of the Ukraine-Russia war.

"The committee judged that some further modest tightening might be appropriate in the coming months, but there were risks on both sides of that judgment depending on how medium-term prospects evolved," the BoE said.

Soaring inflation means the squeeze on households incomes in the UK will be “materially larger” than implied in February, the BoE said. The war in Ukraine will exacerbate global supply chain disruptions with its regional agents already finding evidence the crisis is snarling supply chains for manufacturers, the bank said.

Deputy Governor Jon Cunliffe voted to keep rates on hold, warning of a big hit to demand from higher commodity prices, a move that surprised economists who expected a unanimous vote for higher rates.

Alpesh Paleja, lead economist at the Chamber of British Industry, said “the MPC are clearly making moves to counter growing inflation” as the conflict in Ukraine pushes global commodity prices higher and exacerbating supply chain disruption.

“But they will be walking a tightrope in the months ahead, having to both keep price pressures in check and manage the impact of tighter monetary policy on economic growth – particularly against a background of rising living costs,” he said.

“As households and businesses brace for further price rises, targeted support from government will be needed to cushion the blow until the outlook is on a firmer footing.”

It said the squeeze on British household budgets was likely to be materially larger than it had predicted last month, which was already going to be the biggest in 30 years.

Energy bills, exacerbated by the conflict in Ukraine, are likely to jump in the autumn when regulated tariffs are reset, on top of a 54 per cent increase rise coming next month.

“Today's decision will undoubtedly place many households under greater financial strain,” said Richard Eagling, senior personal finance expert at NerdWallet

“Teamed with high inflation and soaring gas, electricity and food prices, as well as the fact that the average UK adult holds around £32,000 of debt, today's increase could impact some people's ability to afford their repayments. Make no mistake, these are extremely challenging times as far as financial management is concerned.”

Even before Russia’s invasion of Ukraine, the Bank of England expected consumer price inflation to peak at about 7.25 per cent in April, more than three times its target of 2 per cent.

Last week, UK think tank The Resolution Foundation said that inflation may now peak at more than 8.4 per cent, taking it to its highest level since 1982.

The majority of the BoE committee said they raised rates to reduce the risk that recent trends in pay growth and inflation become embedded in expectations.

Businesses surveyed by the BoE expect to raise pay by 4 per cent to 6 per cent this year, compared with 2.5 per cent to 3.5 per cent in 2021.

Stuart Cole, head macro economist at Equiti Capital, said the MPC had clearly moved in a more dovish direction, with the previous calls for a 50 basis points rise by four members gone and one member even voting to keep rates on hold.

“Clearly the deteriorating growth outlook is becoming more of a concern to the MPC, and the easing off on the monetary tightening accelerator evidences this," Mr Cole said.

“Alongside this, the MPC may also be recognising that current inflationary pressures are largely supply-side driven and as such there is little it can do to fight them and concluded that the deflationary impact of the fiscal tightening facing the UK from this April will be enough to counter the inflationary boosting potential of higher wages claims."

Updated: March 18, 2022, 4:29 AM