UK interest rates are at their highest level in 15 years after the Bank of England announced a 12th consecutive increase – but it forecast inflation would finally dip by the end of this year.
Seven members of the Bank’s Monetary Policy Committee (MPC) voted to increase the base rate to 4.5% from 4.25%, representing a 0.25 percentage point rise.
It is the highest level since 2008, and threatens higher bills for hundreds of thousands of homeowners.
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It comes as UK Consumer Prices Index (CPI) inflation remained firmly in double digits in March, squeezing household budgets and proving more stubborn than expected.
Inflation is still expected to drop sharply from April this year, as energy prices decline and household bills are subsidised, the MPC said.
It predicts inflation will settle to just over 5.1 per cent by the final quarter, which would mean Rishi Sunak would just manage to hit the pledge to bring inflation below 5.35 per cent.
“There remain considerable uncertainties around the pace at which CPI inflation will return sustainably to the 2% target,” it added.
It said the fallout from recent banking collapses will reduce US GDP by around 0.25 percentage points, but will have a much smaller impact in Europe.
“Risks remain but, absent a further shock, there is likely to be only a small impact on GDP from the tightening of credit conditions related to recent global banking sector developments,” it said.
The MPC also predicted stronger growth than previous estimates, driven by “stronger global growth, lower energy prices, the fiscal support in the spring Budget and the possibility of lower precautionary saving by households than previously thought.”
New quarterly gross domestic product (GDP) figures will be released on Friday, which is expected to show the UK economy grew over the first three months of the year.
Last week, the US Federal Reserve decided to raise interest rates by 0.25 percentage points, but hinted it could be the last hike.
However, the European Central Bank (ECB) also opted for a 0.25 percentage point increase but left the door open for further increases, with president Christine Lagarde saying “the inflation outlook continues to be too high for too long”.
Simon Massey, managing partner at accountancy firm, Menzies LLP, said: “With inflation stuck at over 10% and all costs in the private sector continuing to rise faster than economists had hoped, it appears the Bank of England had little choice.
“For small and medium-sized businesses, this further rate increase will add to the pain they are already experiencing with higher costs eroding margins and upward pressure on all costs. Many businesses are banking on better times ahead and waiting for rates to fall, but for now they know they must tough it out for a while longer.
“Increased rates may have the impact of delaying investment decisions, which could be counterproductive in the longer term.”
