The Bank of England’s Monetary Policy Committee (MPC), which sets monetary policy to meet the 2% inflation target, announced on 4 August 2022 its decision to raise UK interest rates by 50 basis points to 1.75%.
This is the biggest increase since February 1995 and is the sixth successive time that the MPC has increased interest rates. UK interest rates are also now at their highest since December 2008. The MPC voted by a majority of 8-1 to increase interest rates to 1.75%, with one member preferring to increase rates by 0.25 percentage points, to 1.5%. The next announcement on interest rates will be on 15 September 2022.
Responding to today’s interest rate decision, Suren Thiru, Economies Director, ICAEW, said: “Raising interest rates is more likely to nudge the UK into recession than curb the current spike in inflation. The Bank of England is facing a near impossible trade-off between soaring inflation and an economy teetering on the brink of recession. However, raising interest rates will have little effect on the global headwinds and supply constraints driving inflation, and so risks inducing a downturn by squashing consumer demand.
“Higher borrowing costs will likely drag on business investment by exacerbating the pressures facing firms, leaving many with little financial headroom to invest and help lift productivity. Policymakers must carefully consider what happens next. With core inflation trending downwards, and the recent easing in the public’s expectations for inflation likely to gather momentum as economic conditions deteriorate, the case for shifting to a period of monetary stability is only likely to grow.”
The Bank of England also released its Quarterly Monetary Policy Report, which provides an update on the bank’s outlook for the UK economy. On its latest projections, the central bank expects the UK economy will start to contract in the final quarter of 2022 and continue to contract until the end of 2023. This would make it the longest downturn since the 2008 financial crisis. On this basis, the UK will enter a technical recession (two successive quarters of negative growth) in Q1 2023.
The expected contraction in output and weaker growth outlook predominantly reflects the significant adverse impact of the cost-of-living crisis as the sharp rises in global energy and tradable goods prices weigh on UK household real incomes. The bank expects that UK inflation will now peak at 13.3% in October 2022, following the increase in the energy price cap.