Back-to-back rate increases

15th February, 2022

In a move intended to dampen surging inflationary pressures, the Bank of England (BoE) raised its key interest rate from 0.25% to 0.50%, citing “continuing signs of greater persistence in domestic cost and price pressures”. The widely anticipated rise came hot on the heels of its December increase, in which the base rate was lifted from an all-time low of 0.1% to 0.25%.

The BoE’s decision was not unanimous, however: although five members of the Monetary Policy Committee (MPC) voted for the increase of 25 basis points, the remaining four voted for a steeper rise of 50 basis points, arguing that it would help to “reduce the risk that recent trends in pay growth and inflation expectations became more firmly embedded”.

Rising energy and food prices drove the annualised rate of consumer price inflation to 5.4% during December, registering its most rapid rate of growth since March 1992. Central bank officials now expect consumer price inflation to peak at 7.25% in April; in comparison, the BoE has an inflation target of 2%. The BoE also cut its forecast for economic growth this year from 5% to 3.75%, highlighting the impact of “very large and repeated shocks” to the economy.

In response, the British Chambers of Commerce (BCC) commented “The Bank of England is seeking to dampen an inflationary surge it has little control over” and warned that raising interest rates too aggressively will undermine confidence and hold back growth.

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This article was sourced from Adviser-Hub.co.uk.

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