Interest rates: Bank of England says inflation will hit 11% after raising borrowing costs again – business live

Bank of England raises interest rates to 1.25%

Newsflash: The Bank of England has raised UK interest rates to 1.25%, from 1%, as it continues its battle to fight inflation.

The Bank’s monetary policy committee voted to raise UK interest rates to a fresh 13-year high at its meeting this week, the fifth rate rise in a row, despite concerns that the economy is weakening.

The move comes after UK inflation hit a 40-year high of 9% in April.

Updated at 07.08 EDT

IG: Bank looks like timid cat compared with the Fed

The Bank of England looks cautious and timid compared to its counterparts at the Federal Reserve, which unleashed a 75-basis point hike in rates last night.

So says Chris Beauchamp, chief market analyst at IG Group, who isn’t convinced that the Bank’s pledge to ‘act forcefully’ will convince the markets.

Once again the BoE looks like the timid cat next to the Fed’s roar against inflation, with just a 25bps hike.

Accompanying comments about being prepared to act ‘forcefully’ on inflation will do little when the actual evidence shows the committee remains broadly cautious. A 6-3 vote on 25bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar, and $1.20 will likely be tested once more.

What it means for borrowers and savers

Borrowers now face the highest interest rates since 2009, just after the financial crisis.

Bank rate has now increased from 0.1% in November, to 1.25% today, which will push up the cost of credit.

Sarah Pennells, consumer finance specialist at Royal London, says:

“Mortgage borrowers on a variable or tracker rate will be hit the hardest as their monthly costs will rise, and this could be a significant increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month.

While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.

Rising interest rates should be a a win for savers, but many people are struggling to anything aside in the face of rising inflation.

Royal London’s research shows that almost a third of people plan to reduce the amount they were saving, while a fifth would stop altogether, because of the cost-of-living crisis.

Inflation is also eroding the value of savings, Pennells points out:

For those who can save, the gap between interest rates and inflation, now at 9%, means savers are continuing to lose value on cash they have in the bank. Bank: economy to contract by 0.3% in Q2

The Bank raised interest rates despite predicting that the economy will shrink this quarter.

It says that “UK GDP was weaker than expected in April” (the economy shrank 0.3%) partly due to the winding back of Covid-19 Test and Trace activity.

Bank staff now expect GDP to fall by 0.3% in the second quarter, weaker than expected a month ago, in May’s Monetary Policy Report.

Consumer confidence has fallen further, but other indicators of household spending appear to have held up, the Bank adds

Bank: We’ll act forcefully on inflation if needed

The Bank has also signalled that it will ‘act forcefully’ if it sees signs that inflationary pressures are becoming persistent.

It says:

The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.

The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.

Bank: Inflation will hit 11% in October

The Bank of England has raised its inflation forecast again, and now predicts it will hit 11% this autumn, when energy bills rise.

It had previously estimated that consumer price inflation would hit 10% – far over its 2% target. This new forecast shows that households face even more pain.

Announcing today’s interest rate rise, the Bank says:

CPI inflation is expected to be over 9% during the next few months and to rise to slightly above 11% in October.

The increase in October reflects higher projected household energy prices following a prospective additional large increase in the Ofgem price cap.

The Bank says the surge in inflation is partly due to rising global energy – greatly exacerbated by the war in Ukraine – and other tradable goods prices.

But there are also domestic factors, including “the tight labour market and the pricing strategies of firms”.

Consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. In addition, core consumer goods price inflation is higher in the United Kingdom than in the euro area and in the United States.

Updated at 07.16 EDT

Bank split over how high to raise rates

Today’s decision is not unanimous, though.

Three members of the monetary policy committee – Jonathan Haskel, Catherine Mann and Michael Saunders – voted to raise interest rates to 1.5%, which would have been the biggest rise since 1995.

They argued that:

Faster policy tightening now would help to bring inflation back to the target sustainably in the medium term, and reduce the risks of a more extended and costly tightening cycle later.

But six members – Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, Dave Ramsden and Silvana Tenreyro – voted in favour of a smaller, quarter-point rise to 1.25%.

Updated at 07.17 EDT

Bank of England raises interest rates to 1.25%

Newsflash: The Bank of England has raised UK interest rates to 1.25%, from 1%, as it continues its battle to fight inflation.

The Bank’s monetary policy committee voted to raise UK interest rates to a fresh 13-year high at its meeting this week, the fifth rate rise in a row, despite concerns that the economy is weakening.

The move comes after UK inflation hit a 40-year high of 9% in April.

Updated at 07.08 EDT

The clock is ticking towards noon, and the Bank of England’s interest rate decision.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says the City broadly expects a quarter-point rate rise, to 1.25%.

The focus now is sharply trained on the Bank of England’s decision later.

Worries have been rising that inflation could become too hot to handle for the Bank of England, given that the UK economy is already shrinking and is sorely lacking the insulation needed to protect itself from the impact of rate rises. There overall expectation is that it’ll keep the rate rise to 0.25% but given the harder line stance taken by the Federal Reserve, some policymakers may decide to swallow the bitter pill sooner rather than later and vote for a steeper hike of 0.5%.

Although there are still high hopes that supply snarl ups around the world will start to ease, energy prices are staying stubbornly elevated, with Brent Crude hovering around $120. The price has crept up again after the International Energy Agency warned that supply will outstrip demand next year, as Russia feels the weight of embargos and demand is forecast to resurge in China.

Updated at 07.09 EDT

Why are central banks pushing to raise interest rates?

My colleague Richard Partington has written an explanation of why central bankers are raising interest rates, and the impact it will have.

It’s online here, and here’s a flavour:

How does it affect you?

When the central bank raises interest rates, high street lenders pass them on to consumer and commercial borrowers and savers. While they’re typically slower to raise the interest paid on deposits, mortgage costs can rise quite quickly.

Those on standard variable rates – which track the Bank’s base rate – are the first to see the difference. However, most homeowners have fixed-rate mortgages. This means you won’t see higher costs until you come to the end of your term. This is one of the reasons central banks say it can take time for higher rates to counter inflation.

Renters are also likely to come under pressure, as buy-to-let landlords pass on higher borrowing costs to their tenants.

When the Bank raised interest rates in May by 0.25 percentage points to 1%, analysts at Hargreaves Lansdown estimated it would push mortgage payments up by over £40 per month.

Against a backdrop of rising interest rates, the Office for Budget Responsibility estimates household debt servicing costs to rise from £55bn to £83bn over the next two years.