Bank of England raises interest rates to 2.25%

LONDON • To tackle high inflation, the Bank of England (BoE) on Thursday increased interest rates by 0.5 percentage points to 2.25%, the highest since 2008. It was the seventh successive rise since December 2021 and the second 50-basis-point increase in a row, reported Xinhua.

The UK’s central bank said on Thursday it will “take the actions necessary” to return inflation to the 2% target sustainably in the medium term. The country’s Consumer Price Index (CPI) rose by 9.9% in the 12 months to August, down from the 40-year high of 10.1% in July.

With the latest inflation figures showing only a small decrease from recent record highs, this rise in the base rate feels in many ways like it was inevitable, commented Federation of Small Businesses (FSB) National Chair Martin McTague.

However, commercial loans, which are pegged to the base rate, will rise, eating away at margins that are already under enormous pressure from inflation, sky-high energy bills and slumping consumer and small business confidence, McTague noted.

Also on Thursday, the BoE decided to reduce the stock of purchased UK government bonds financed by the issuance of central bank reserves by £80 billion (US$90.1 billion) over the next 12 months to a total of £758 billion.

This is significant as another form of monetary tightening, and because there had been some speculation that the bank would delay the start of active quantitative tightening to help the government to finance the additional borrowing, which would have sent a terrible signal, Julian Jessop of the Institute of Economic Affairs said.

On Thursday, the BoE said its staff now expected the UK’s GDP to fall by 0.1% in the third quarter, below August’s projection of 0.4% growth, and a second successive quarterly decline. It cemented fears that the UK economy will soon slide into recession.

While the latest interest rate hike is further evidence that the BoE is taking a hard line on tackling inflation, it will also increase the risk for individuals and organisations exposed to debt burdens and rising mortgage costs, dampening consumer confidence, David Bharier, head of research at the British Chambers of Commerce (BCC), said.

Despite support packages announced by the UK government this month to cap energy prices, the BoE said energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back.

Consumer spending will fall as a greater share of households’ resources is diverted towards energy bills, and that will lead to a recession at the end of this year and an extended period of weak growth, according to Tom Pugh, an economist at business advisory firm RSM UK.

The latest business surveys also showed economic weakness. The S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to 47.3 in August, down from 52.1 in July. This was the first sub-50 PMI reading since May 2020.

A monthly comparison of independent projections published by the UK Treasury on Wednesday showed an average new forecast of 3.6% for GDP growth in 2022 and 0.1% in 2023, down from May’s 3.9% and 1.3%, or February’s 4.4% and 2% respectively. — BERNAMA / Pic by BLOOMBERG