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The Bank of England has raised interest rates back to the pre-pandemic level of 0.75% as it tries to mitigate the effect of the rising costs of living and the impact that the conflict in Ukraine is having on the global economy.
The Monetary Policy Committee (MPC) voted with a majority of 8-1 to increase the rate and added the decision was taken “given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist”.
The MPC said the invasion of Ukraine by Russia has led to “further large increases” in energy and other commodity prices including food prices and is likely to “exacerbate” global supply chain disruptions, and has increased the uncertainty around the economic outlook “significantly”.
As such, it predicts global inflationary pressures will “strengthen considerably” further over coming months, while growth in economies that are net energy importers, including the United Kingdom, is likely to slow.
The 12-month CPI inflation rose from 5.4% in December to 5.5% in January. Inflation is expected to increase further in coming months, to around 8% in 2022 Q2, and “perhaps even higher” later this year.
The news comes after the US Federal Reserve raised interest rates by a quarter of a percentage point for the first time since 2018.
In the minutes of the meeting the MPC said: “The Bank of England condemns Russia’s unprovoked invasion and the suffering inflicted on Ukraine. The Bank is working closely with the UK Government to support its response in coordination with international authorities. The Bank’s Monetary Policy Committee (MPC) supports this condemnation and welcomes these actions.”
Responding to the announcement, Alpesh Paleja, CBI lead economist, said: “With ongoing conflict in Ukraine pushing global commodity prices higher and exacerbating supply chain disruption, the MPC are clearly making moves to counter growing inflation.
“But 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.”
He added: “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 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.”
