The Bank of England has raised interest rates to 1.75% from 1.25% - taking them to the highest level since January 2009 - and has warned the UK is set to enter recession this year.
Its Monetary Policy Committee (MPC) voted 8-1 in favour of the rise, as it said higher energy prices were likely to push inflation to 13% – well above the 2% target.
In minutes from the rates decision meeting, the bank said the majority of the MPC felt a “more forceful policy action was justified”, adding: “Against the backdrop of another jump in energy prices, there had been indications that inflationary pressures were becoming more persistent and broadening to more domestically driven sectors.”
“Overall, a faster pace of policy tightening at this meeting would help to bring inflation back to the 2% target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later.“
The bank stated: “Inflationary pressures in the UK and the rest of Europe had intensified significantly since May – that largely reflects a near-doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
“As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
“CPI inflation is expected to rise more than forecast in the May report, from 9.4% in June to just over 13% in the fourth quarter, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”
It added: “The United Kingdom is now projected to enter recession from the fourth quarter of this year.
“Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
The rates news also came on the day the Office for National Statistics (ONS) said gas prices had shot up nearly a third in the last week of July to reach the highest average cost since mid-March.
The ONS stated that the National Grid saw the average price for gas increased by 31% to 9.8p per kilowatt hour over the week to 31 July.
Ofgem also confirmed today that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”.
The regulator said the change would go “some way to provide the stability needed in the energy market”, adding: “It is not in anyone’s interests for more suppliers to fail and exit the market.”
Today also saw figures released showing UK construction firms had seen activity in the sector decline for the first time since January 2021 due to pressure from soaring costs and higher interest rates, according to new figures.
The closely watched S&P Global/CIPS construction purchasing managers’ index (PMI) scored 48.9 in July, dropping from a reading of 52.6 in the previous month. It also represented the worst reading since May 2020. Anything above 50 is considered growth.
In a poll published by Ipsos on Thursday morning, 64% of people said they were fairly or very concerned about the prospect of rising interest rates – a figure that rose to 80% among those aged 18 to 34.
Some 67% said they were worried about the value of their savings, while concern about energy bills and the rising cost of living in general reached 75% and 89% respectively.
Dr Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “Soaring prices are the biggest challenge facing businesses in Scotland and across the UK currently.
“The risk is that rising interest rates will cause demand growth to weaken further in the coming months, as people are encouraged to save which is hoped will cool supply demand, however firms are still telling us that they are raising their prices now in response to record high costs for energy, labour, food and raw materials.
“Our latest research also indicates that most SMEs are holding back or pulling back investment, which does not bode well for growth prospects and long-term business confidence.
“While monetary policy begins to step up its response to the current economic climate, it must also come in hand with further support from government to ease the upfront cost burdens impacting businesses.”
Andrew McRae, the Federation of Small Businesses’ policy chair for Scotland, said: “There’s a clear need to get a grip on inflation, as nine in 10 small businesses in Scotland have seen costs rise in the last three months.
“But a jump in interest rates will jack up the cost of borrowing for many local and independent businesses in Scotland – and a predicted slowdown in the economy will make it hard for many operators to rebuild their strength after the trials of the last two years.
“That’s why policymakers need to cut small firms some slack – that means long-awaited action on energy bills, to give neighbourhood firms some of the protections afforded to households. It requires action to reduce the cost of doing business.”
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