UK follows fed in hiking interest rates

The UK's base interest rate was increased by the Bank of England to 0.75 per cent on Thursday in the latest bid to curb fast-growing inflation.

Interest Rate Increase
The 0.25 per cent rise mirrored that announced by the US Federal Reserve less than 24 hours earlier - the first increase in America's near-zero rate since 2018.

Governments on both sides of the Atlantic are increasingly worried by soaring inflation, exacerbated by shortages and price rises arising out of the Russian invasion of Ukraine.

Analysts expect rates in both the US and UK to progressively increase to around two per cent in the coming year.

Fears grow as interest rate continues to rise

Minutes from the Bank of England's Monetary Policy Committee (MPC), which voted to increase the rates for the third time in four months, showed its members wanted to tighten monetary policy to prevent inflationary becoming embedded.

"Given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures would persist, most members of the committee judged that a 0.25 percentage point increase in Bank Rate was warranted at this meeting.

"The effects of Russia’s invasion of Ukraine would likely accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes.

"Monetary policy should be tightened at this meeting in order to reduce the risk that recent trends in nominal pay growth, domestic pricing, and inflation expectations strengthened and became embedded, and thereby to help to ensure inflation was at target sustainably in the medium term."

The MPC warned that inflation, currently running at 5.5 per cent, could increase to about eight per cent in the second quarter of the year and might go even higher before the end of the year.

Reacting to the rates rise, Alpesh Paleja, lead economist at the Confederation of British Industry (CBI), said that the MPC felt it had to take action with the Ukraine conflict pushing global commodity prices higher and exacerbating supply chain disruption.

"But," he added, "they will be walking a tightrope in the months ahead, having to both keep price pressures in-check and manage the impact of tighter monetary policy on economic growth – particularly against a background of rising living costs.

“As households and businesses brace for further price rises, targeted support from government will be needed to cushion the blow until the outlook is on a firmer footing. By using the forthcoming Spring Statement (on March 23) to facilitate more investment-led growth – including through the introduction of a permanent investment – the Chancellor can push the UK onto a more ambitious growth trajectory.”

Inflation vs interest rates - which is worse?

However, a survey from the Institute of Directors (IoD) ahead of the rates decision showed that the "vast majority"  of business leaders (83 per cent) were more concerned about the impact of inflation, rather than the 11 per cent who put interest rates as their main concern.

Kitty Ussher, IoD chief economist, said the organisation was backing a rates rise to help in the fight against inflation. "One thing is clear: inflation itself is a very real and present concern to business leaders," she said. "Our data show that, when forced to choose, our members are more worried about inflation than rising interest rates."

This view was not shared by Suren Thiru, head of economics at the British Chambers of Commerce, who described the interest rise as ill-timed during a period of growing, global "headwinds".

“While interest rates remain low by historic standards, the latest rise will be viewed by many as a further step in a prolonged period of aggressive monetary tightening at a time when consumers and businesses are struggling under a myriad of rising cost pressures," he said.

“Increasing interest rates will do little to curb the global causes behind this inflationary surge and risks intensifying the headwinds facing the UK economy by damaging confidence and deepening the financial squeeze on consumers and businesses."
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Read more news and views from David Sapsted.

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