More pain for Brits as Bank of England hikes interest rates to 1.25%


More pain for Brits as Bank of England hikes interest rates to 1.25% after historic US rise and says inflation will hit 11%… but stops short of an even BIGGER increase over fears economy is plunging into the red

  • The Bank of England has announced the latest interest rates decision at noon
  • The base rate is being pushed up by 0.25 percentage points to 1.25 per cent
  • Rise could have been bigger but fears that UK economy is already in reverse 

The Bank of England hiked interest rates for the fifth month in a row to 1.25 per cent today – but stopped short of an even bigger rise over fears the economy is plunging into the red.

The Monetary Policy Committee pushed up the base rate by 0.25 percentage points to another 13-year high as it scrambles to rein in rampant inflation, which it now expects to reach 11 per cent.

But mortgage-payers were spared an even bigger increase – which many analysts had anticipated could be 0.5 percentage points – after grim figures this week showed the UK economy is already going into reverse.

The decision at noon came after the US Federal Reserve imposed an eye-watering 0.75 percentage point increase – the biggest in decades – as it wrestles with the same problems.  

It is the first time the Bank rate has been higher than 1 per cent since January 2009.

Meanwhile, former governor Lord King has urged Boris Johnson to level with the public about the ‘inevitable’ hit to living standards.

He said the crisis will be ‘reminiscent of the 1970s’ and suggested the PM has to be honest about what is happening.

‘Our leaders need to give us a clear narrative explaining why recent events will inevitably lower our national standard of living, how that burden will be shared, why it is important to bring inflation down, and why measures to raise economic growth and reduce regional disparities will take many years to come to fruition but will work only if we make a start now,’ he wrote in The Spectator.

Bank of England governor Andrew Bailey is set to announce the interest rates decision at noon today

Bank of England governor Andrew Bailey is set to announce the interest rates decision at noon today

If the Bank of England rate reaches 1.25 per cent as expected it will be the first time since January 2009 it has been higher than 1 per cent

If the Bank of England rate reaches 1.25 per cent as expected it will be the first time since January 2009 it has been higher than 1 per cent

Official figures from the ONS show that CPI would have last been above the April 2022 level of 9 per cent in March 1982 - when it was 9.1 per cent

Official figures from the ONS show that CPI would have last been above the April 2022 level of 9 per cent in March 1982 – when it was 9.1 per cent

How inflation threatens families and the public finances 

Inflation has long been seen as one of the biggest threats to economies.

In extreme examples, it has spiralled out of control and sparked panic.

The German Weimar Republic effectively collapsed after the value of the mark went from around 90 marks to the US dollar in 1921 to 7,400 marks to the dollar in 1921.

In Zimbabwe between 2008 and 2009 the monthly inflation rate was estimated to have reached a mind-boggling 79.6billion per cent.

Although inflation has faded in the minds of Britons who have become used to ultra-low interest rates and stable prices, it caused chaos here in the 1970s.

Deregulation of the mortgage market, the emergence of credit cards and an overheating economy drove the rate to an eye-watering 25 per cent in 1975.

People would rush to buy goods with their wages after pay-day, as the costs were rising so quickly.

Strikes erupted as there was pressure for pay packets to keep pace with prices.

Unemployment rose as the economy tipped into recession, and the government had to pump up interest rates in a bid to bolster the pound and control the surge.

That meant mortgage interest rates spiked into double digits.

And as a result servicing the national debt became a serious problem. 

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The nine-person MPC includes governor Andrew Bailey, two deputy governors – Sir Jon Cunliffe and Ben Broadbent – and chief economist Huw Pill.

With headline CPI inflation forecast to reach double-digits by the end of the year, the MPC has voted for a rise in each of the last four meetings, in December, February, March and May.

However, it has been criticised for not responding quickly enough to rising prices and the overheating labour market. 

Last time three out of nine members of the Monetary Policy Committee already voted for rates to be set at 1.25 per cent.

However, some things have changed since then. The UK economy looks set to struggle, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.

The Bank has been given a little more wriggle room by the Chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.

An interest rate raise will eat away at some of this handout, because the cost of borrowing will go up for homeowners.

But savers will benefit from a hike.

‘April’s GDP data … surely will mean that the internal block – Bailey, Broadbent and Pill – sticks to voting to raise Bank Rate by 0.25% this month,’ said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

‘And given that some members thought last month that the guidance regarding further rises in interest rates was obsolete, we expect to see at least one of them, most likely Cunliffe, to vote for no change.

‘With markets currently pricing in a 34bp increase in Bank Rate this week and a further 41bp rise for the August meeting, we expect both rate expectations and sterling to drop in the wake of this week’s meeting.’

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.’

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays for in dollars, would rise.

This month, the average price of filing a family car topped £100 for the first time.

‘By raising interest rates, the Bank is putting the brakes on an economy that is already slowing of its own accord,’ Mr Khalaf said.

‘That risks the economy stalling, or worse, going into reverse.’

GDP was down for the second month in a row in April after a 0.1 per cent dip in March, underlining the 'Stagflation' threat as inflation soars

GDP was down for the second month in a row in April after a 0.1 per cent dip in March, underlining the ‘Stagflation’ threat as inflation soars

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