Bank of England confirms interest rate rise to 1.75% as inflation to hit 13% – live



ECB hikes interest rates for first time in 11 years by larger-than-expected amount

The Bank of England has hiked the interest rate to 1.75 per cent in the biggest increase for 27 years.

The cost-of-living crisis will continue throughout next year and only begin to ease in 2024, with the UK economy contracting for five consecutive quarters, according to the Bank’s latest forecasts

Inflation is set to surge to 13.3 per cent this winter when soaring gas prices mean that consumers face average energy bills of £3,500 – up from £1,200 a year ago – the Bank said.

Households face the longest and sharpest fall in living standards on record as energy bills triple and the UK plunges into a deep and protracted recession, the Bank of England has warned, in one of its bleakest ever assessments of the economy.

The Resolution Foundation think tank has warned that next year inflation could reach an “astronomical” record-high of 15 per cent – the highest level since 1980.

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£50-a-month jump in average tracker mortgage costs following rate rise

Homeowners whose mortgages directly track the Bank of England base rate will see around £50 per month added to their costs typically, according to industry calculations.

The Bank of England raised the base rate by 0.50 percentage points on Thursday, taking it from 1.25% to 1.75%, marking the biggest single rate jump since 1995.

The £50.43 increase was calculated by trade association UK Finance and is based on average mortgage balances.

This adds up to an extra £605.16 in mortgage costs over the course of a year.

The Bank of England has raised the base rate by 0.50 percentage points, taking it from 1.25% to 1.75% (Joe Giddens/PA)

(PA Archive)

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Labour urges government to scrap tax breaks on oil and gas producers

Labour has urged the government to scrap tax breaks on oil and gas producers and provide more help to people.

Responding to the Bank of England’s forecast, shadow Treasury minister Pat McFadden said: “The Bank of England’s forecasts show us how hard this crisis is hitting families, how much is left to come and how vulnerable 12 years of economic mismanagement by the Conservatives has left us.

“Not only is this the highest rate increase in 25 years, but inflation could hit 13 per cent while real wages fall, pushing more and more families into financial difficulty.

“The government must act fast if we are going to avoid one of the worst recessions since the 1990s, by scrapping tax breaks on oil and gas producers and providing more help to people who are struggling to pay their energy bills.”

(ANP/AFP via Getty Images)

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Poorest to be hardest hit by inflation

Andrew Bailey warned it was the poorest who were hit hardest if rising inflation led to a wage-price spiral.

He defended his call for workers not to demand “high wage increases” to avoid fuelling the crisis.

The Bank of England governor said: “It is the least well-off who get hit hardest by this and it is the least well-off who have the least labour bargaining power, typically.”

The Bank of England’s Ben Broadbent also dismissed suggestions the increase in interest rates was a “sledgehammer” and said there were some signs of domestic inflationary pressures such as rising wages and prices.

The deputy governor said the vast majority of the factors driving up inflation were global ones, particularly those linked to the Ukraine war, “but they are not the whole of it”.

In the face of an “enormous external hit” to the economy “I think it was to be expected that to some degree households would want to protect their real incomes by asking for more pay and firms would want to protect their real profits by seeking compensatory rises in their own prices”.

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Bank of England deputy governor Ben Broadbent set out the historic context of the energy price spike.

He told a press conference: “In the worst two-year period of the ’70s, which I think was between the first quarters of 1974 and 1976, the share of income going on household utility bills, rose by – I think – 0.7 percentage points.

“So it absorbed that much of real income growth over that period.

“Between the first two first quarters of 2021 and 2023, we think that number will be pretty much 3.5 percentage points, so around five times as big. So that is the scale of just the energy price shock.

“And on top of that you have what happened as a result of the pandemic last year and other effects of the war, for example, on wholesale traded food prices.”

He said the Bank will do “whatever is necessary” to ensure the economic shocks “do not persist via more domestic inflationary pressure longer than they should”.

“That will be one big difference between this shock, much larger though it is, and what happened in historical episodes – in particular the ’70s and ’80s.”

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Bank of England governor Andrew Bailey said: “One of the great strengths of being an independent central bank is that actually the political pressures have been very well managed throughout the life of the MPC (monetary policy committee) in my view, and obviously, we’ve had many governments throughout that life.

“And that is the best way to manage it, in my view.”

He added: “One of the great virtues of our system is that the Bank of England takes these decisions independently, respecting, of course, the importance of the remit.”

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Liz Truss, the frontrunner to be the next prime minister, has said she will look at the Bank of England’s mandate to make sure it has a “tight enough focus on the money supply and on inflation.”

Bank of England governor Andrew Bailey told a press conference the mandate set in 1997 was “price stability” and the chancellor then sets the target.

“That’s a somewhat different structure to many other countries,” he said.

“The great virtue of our system is it is very clear what the target is.

“But I also make the point that the structure was set up with a very clear mandate of price stability.”

(PA)

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Bank of England governor avoids Tory leadership question

Bank of England governor Andrew Bailey sought to steer clear of the Tory leadership contest and Liz Truss’s plans for immediate tax cuts.

He told a press conference: “It’s not for the Bank of England to get involved in the leadership election that’s taking place for the leader of the Conservative Party and the next prime minister.”

He added: “I look forward to working with whoever the next prime minister is and I’m sure there will be a budget and fiscal policy will be announced, but at this stage I’m not going to go any further than that in commenting on what might or might not happen.”

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‘Economic cost to the war in Ukraine,’ Bank of England governor says

Bank of England governor Andrew Bailey has said there is an “economic cost to the war” in Ukraine, but insisted it will not deflect the Bank from “setting monetary policy to bring inflation back to the 2 per cent target”

He told a press conference: “There is an economic cost to the war. But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2 per cent target.”

The Bank of England governor went on: “Domestic inflationary pressures have also remained strong. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rise in their costs.

“The labour market remains tight with the unemployment rate of 3.8 per cent in the three months to May and vacancies at historical high levels.

“The tightness of the labour market partly reflects the fall in the labour force since the start of the pandemic, which is in part due to the large rise in economic inactivity shown by the orange bars in this chart.

“As a result, and consistent with the latest agents’ survey, underlying nominal wage growth is expected to pick up further.”

(Copyright 2022 The Associated Press. All rights reserved.)

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Bank of England governor Andrew Bailey highlighted the impact of soaring energy costs on the wider economic picture.

At a press conference he said the “further sharp increase in energy prices” had been the biggest development in recent months.

“Wholesale gas futures prices for the end of this year… have nearly doubled since May,” he said. They are “almost seven times higher” than forecasts had suggested a year ago, he added.

“That’s overwhelmingly a consequence of Russia’s restriction of gas supplies to Europe and the risk of further cuts.”

(PA)

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How will savings be impacted by latest interest rate hike?

Aileen Robertson, Head of Savings at Atom bank commenting on the impact the rise in interest rates will have on savers said high levels of inflations are still likely to erode savings despite interest rate increases.

“The move from the Bank to increase the base rate by a further 0.5 per cent is intended to curb inflation (which is currently 9.4 per cent) to the target level of 2 per cent – whilst this is the biggest interest rate hike in 27 years, it’s still unlikely to do that. High levels of inflation erode the value of savings, so if you’re putting money away for the future – you need to get the best interest rate you can,” Ms Robertson said.

“Put simply, higher interest rates mean that savers get more reward for saving and that borrowing money becomes more expensive. This move should be good news for savers, but it’s up to banks to decide how much of the increase they pass on to customers. Savers have had it rough for a long time, and traditional high street banks have done very little to support them for many years as they continue to offer rock bottom rates to savers.

“I would recommend keeping a close eye on your bank’s reaction to this change and shopping around to ensure you’re getting the best rate. Blind loyalty to your bank through this difficult period can leave you worse off in the long-term, so it pays to look for a better deal.”



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