Bank of England raises interest rates to 0.25%

Bank of England raises interest rates to 0.25%

The Bank of England has raised interest rates for the first time in more than three years, in response to calls to tackle surging price rises. The increase to 0.25% from 0.1% came despite fears that the Omicron variant of Covid could slow the UK economy by causing people to spend less.


The Bank of England has raised interest rates for the first time in more than three years, in response to calls to tackle surging price rises.

The increase to 0.25% from 0.1% came despite fears that the Omicron variant of Covid could slow the UK economy by causing people to spend less.

The cost of living rose by 5.1% in the year to November, latest figures show.
That was the highest rate since September 2011 and well above the Bank's 2% inflation target.

However, one business group said the rate rise would do little to stop prices going up, since costs were being pushed higher by global factors largely outside the Bank's control.

The decision by the Bank of England will add just over £15 to the typical monthly repayment for a tracker mortgage customer.

A standard variable rate mortgage-holder is likely to pay nearly £10 extra a month.
Nearly two million people in the UK have one of these two types of mortgage.

While savings rates may increase slightly, returns are still well below the rate of inflation.

The Bank can raise interest rates to help control price rises - but many experts had expected it to hold off because of uncertainty about Omicron.

Yet on Thursday, it said the prices of global assets, such as stocks and bonds, had largely recovered after an initial fall in response to news of the new variant.

Successive waves of Covid also appeared to have had less impact on economic growth, the Bank added, although there was uncertainty around the extent to which that would prove to be the case this time.

"Consumer price inflation in advanced economies has risen by more than expected," it added.

The Omicron variant could reduce economic activity early next year, said the Bank, although it was unclear how much of an effect it would have on inflation worldwide.

The Bank of England seems to like a surprise. Last month, acknowledging the expectation of an interest rate rise happening, it held off. This month, with the main development being the spread of Omicron, it has raised at a time when most expected it to hold.

It goes to show that the arguments have been finely balanced. The other development has been that inflation has hit even harder and even faster than expected. Six per cent is now the expected peak in the spring, which will represent the highest rate of inflation on the targeted CPI measure for 30 years. It is treble the Bank of England's target.

While it is important to note that a 0.15% rise is modest and still leaves base rates very close to historic lows, it is not ideal that this comes at the precise moment where some forms of consumer confidence, especially in terms of going out, appear to be slumping. The Bank's Monetary Policy Committee was briefed by the Chief Medical Officer, Chris Whitty, and intriguingly chose to mention the possibility that Omicron could raise inflationary pressure by further hobbling supply chains for goods, and the supply of workers.

The argument will be that it is better to nip expectations of inflation in the bud, than try to contain them once they get going. A rise now is preferable, in the eyes of the MPC, to having to rise by even more over the next year or two. The Bank is choosing to act on what it knows about inflation, rather than hold back on what it doesn't know about Omicron.

The Bank's Monetary Policy Committee (MPC) voted 8-1 in favour of the increase. The dissenting MPC member, Silvana Tenreyro, voted to keep rates as they were.
Rates had been at 0.1%, a record low, since March last year, when they were cut in response to the effects of the coronavirus pandemic.

It was the second month in a row that Bank policymakers had surprised the markets.
Economists had expected a rate rise at the MPC's last meeting in November, but policymakers voted to hold fire.
This time, analysts expected a further delay because of Omicron, but the committee thought differently.

"The Bank of England's decision to raise interest rates was surprising, given mounting uncertainty over the economic impact of the Omicron variant," said Suren Thiru, head of economics at the British Chambers of Commerce.

"While today's rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement - not as a partial reversal of last year's cut."
He added that the current inflationary spike was mostly driven by global factors, so higher interest rates would do little to curb further increases in inflation.

Instead, the government needed to find practical solutions to the UK's supply chain problems and labour shortages, he said.
The MPC also voted unanimously to maintain the Bank's asset purchase scheme at £875bn.
The last time the Bank raised interest rates was in August 2018, when they reached 0.75%.

They were then cut twice in March 2020 at the start of the pandemic.






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