Why the Bank hiked rates for the first time in over three years
The Bank of England has become the first major central bank to raise rates since the start of the pandemic.
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Your support makes all the difference.The Bank has raised rates for the first time in more than three years to battle surging inflation.
Here, the PA news agency looks at some of the key reasons behind the Bank’s decision to hike the base rate to 0.25% from 0.1% and what it means for the UK economy:
– Why has the Bank raised rates?
The Bank is tasked with keeping inflation between 2% and 3% and members of the Monetary Policy Committee (MPC) are worried that without action, inflation could spiral well above the target.
They said inflation, which has already jumped to 5.1%, was set to rocket as high as 6% next April – the highest for nearly 30 years.
While it has been prepared to look through above-target inflation since May this year, it said now was the time to act to rein in price hikes.
– Why now, given the threat of Omicron?
The Bank said there were already signs that Omicron and restrictions to control it were impacting economic growth and that output was set to come under pressure in December and early next year as a result.
But the move to focus on inflation even amid the uncertainty shows how concerned it is over rising prices.
It added in the minutes of the decision that the economic impact of Omicron may even push up inflation further, prompting it to act.
– Why is inflation so high?
Inflation has been rising at a rate of knots over the past nine months as economies have reopened worldwide and begun recovering from the initial pandemic impact.
Supply chains have not been able to keep pace with the sudden increase in demand, leading to shortages of goods and higher prices in the UK and globally.
To add to this, fuel and energy prices have also been surging, while a strongly rebounding jobs market and hiring difficulties in the UK have also seen wages rise rapidly.
– Will this rise help bring inflation under control?
The Bank has already made it clear that many of the inflation factors are global issues, which it cannot directly influence.
But it did caution in the latest decision over signs that UK-specific inflation pressures are also building.
The rate rise – albeit small – should help start to bring these under control, while also reining in rising inflation expectations.
– What impact will the hike have on households and businesses?
Around three-quarters (74%) of mortgages are fixed rate, so most homeowners will be cushioned from the immediate impact of the base rate rise.
That said, experts believe the move will have a far greater degree of psychological importance and will lead to less cheap credit and a period of belt-tightening among households.
– What about Government debt?
Chancellor Rishi Sunak will no doubt be grimacing at the news of a rate hike, given the impact this will have on the UK’s mammoth debt pile.
He warned when delivering the recent Budget that even a one percentage point rise in rates would cost the UK an extra £23 billion in interest payments on its debts, which have been sent to sky-high levels by Covid-19 support measures.
– Will rates rise further?
The Bank has stuck by its view that inflation will fall back in the second half of next year.
But it said there were “two-sided risks” around the outlook and believes some further “modest tightening of monetary policy” will be needed, suggesting further hikes may be on the way.
Economists believe it will be very cautious with any further increases, with many predicting the next may not come until May 2022 and rates only just returning to pre-pandemic levels by the end of next year.