Bank of England raises interest rates to 0.25% | interest rates

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The Bank of England unexpectedly raised interest rates for the first time in three years amid growing concerns about inflation, despite the rapid spread of the coronavirus variant, the Omicron.

Threadneedle Street’s Monetary Policy Committee (MPC) voted eight to one to raise interest rates from a historic low of 0.1% to 0.25%, arguing that the pressure on households from the rising cost of living outweighs the risks to the economy from the new alternative.

The increase will add to the financial pressure on households with variable rate mortgages and hit businesses with higher borrowing costs, and comes after the government cut universal credit and announced plans to raise taxes starting in the spring.

With inflation at its highest rate in a decade, the bank warned that there was unlikely to be any reprieve during the winter months from rising energy costs that raised the rate from 5.1% currently to 6% next spring – tripling Its official target of 2%. .

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However, the sudden decision comes amid a sharp deterioration in the economic outlook as Omicron caused consumer confidence to plummet, leading to a flurry of cancellations for hospitality companies during the key festive trading period.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said: “The MPC’s decision to raise bank interest rates today, before it knew the full extent of the economic damage from the escalating Omicron variable, underscores how concerned it is about the outlook for inflation.”

Sterling rose sharply in the global currency market on Thursday, up about one cent against the dollar, trading above $1.33 after the central bank became the first to raise interest rates among its major global peers.

In a sign that institutions are struggling to tackle inflationary pressures around the world, the European Central Bank also said on Thursday that it would scale back a multi-trillion euro pandemic support package. The US Federal Reserve said earlier this week that it expects to raise interest rates three times in 2022.

Setting the bank on a path to higher borrowing costs Despite immediate short-term concerns about the economy, Threadneedle Street warned that inflation is rising more than expected due to rising energy costs and global supply bottlenecks that may take time to dissipate.

In a pre-emptive strike to allay inflation fears, he said he could have waited for a gauge of how Omicron would develop but that there was “a strong case for monetary tightening now, given the strength of current underlying inflationary pressures and in order to maintain price stability over the medium term”.

With the bank sounding the alarm over the cost of living and cutting emergency stimulus for the first time since the pandemic began, Labor said the government urgently needed to take action to support families.

“Prices have been on the rise and many are feeling the pinch, so families will be concerned about the additional pressure on their finances from mortgage payments and other debt,” said Shade Counsel Rachel Reeves.

The bank mistook the city in November by backing away from raising borrowing costs, preferring to wait for more official numbers to assess the impact on jobs from the end of the holiday despite expectations of a rate hike.

Although the UK job market remained strong according to the latest available figures, economists predicted that the emergence of Omicron would once again tempt the BoE to wait for more information.

The Monetary Policy Committee said in the minutes of its decision that the new wave of the epidemic will affect the economy in the short term, but its impact on inflation over the coming months is still unclear. The pricing committee lowered its forecast for GDP growth in the final three months of the year to 0.6%, from 1% in November.

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Only one outside member of the nine-member panel, economist Silvana Tineiro, voted against raising interest rates.

The bank warned that new government restrictions and voluntary social distancing would hobble the economy this month and into early 2022, and that it would be ready to review its position by the time of the next Monetary Policy Committee meeting in February.

Despite Thursday’s rate hike, it remains 0.25% lower than it was before the pandemic, when borrowing costs were set at 0.75% before the first wave spread to Britain in early 2020.

Few households will see mortgage costs rise as most have been based on fixed rates, said Jack Leslie, chief economist at the Research Institute of Resolutions.

“While the timing of the bank’s decision to raise interest rates is odd given the economic damage Omicron is currently causing, the truth is that it is unlikely to make much difference to inflation or household budgets,” he said.

Explaining the rate increase, the bank said successive waves of Covid had had less impact on GDP as households and businesses gradually adjusted to life with the pandemic. Despite the uncertainty this time around, she said Omicron could fuel persistently high levels of inflation if it leads to persistent disruption to supply chains through factory closures and bottlenecks at ports.

However, Hanna Odino, an economist at accounting firm PwC, said speculation that the bank will embark on a spring rate hike may be far from reality.

“with [Covid-19] Cases at record levels and expected to continue to rise, the risk of further social distancing measures, and signs that business confidence is already weakening, this modest rate hike will likely be the first and only for some time.”

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