Bank hikes interest rates to 15-year high of 5.25%
ITV News' Economics Editor Joel Hills has the latest on the mixed outlook for interest rates
Interest rates have risen to a 15-year high of 5.25%, with the Bank of England carrying out a hike of 0.25 percentage points.
It is the 14th consecutive rate rise, with the Bank seeking to bring down inflation, but prices have been rising at a slower rate than expected recently, giving cause for optimism that this could be the last increase for a while.
But the high-point of 5.25% reached today has not been matched since the global financial crisis in March 2008, demonstrating the difficulties faced by the UK economy.
UK Consumer Prices Index (CPI) inflation was 7.9% in June - still significantly higher than the Bank's target of 2% - but down from 8.7% in May and the lowest rate since March 2022, according to the Office for National Statistics (ONS).
The move by Bank’s Monetary Policy Committee (MPC) to only increase interest by 0.25 percentage points, rather than the 0.5 rise carried out in June, is an encouraging sign.
UK inflation is expected to drop below 5% in the final few months of 2023, according to new projections from the Bank of England, allowing the PM to meet his target of halving inflation by the end of the year.
Bank Governor Andrew Bailey said: "Let me be clear, we do expect goods price inflation to ease over the rest of the year, and there are indicators that suggest it could happen faster than in our projection.”
The Bank predicted that Consumer Prices Index (CPI) inflation will fall to 4.9% in the final quarter and remain above 2% until mid-2025.
The recent easing of price rises has been driven largely by a fall in international energy prices, which are set to reduce the average UK household’s energy bill to below £2,000 a year by October.
The Bank of England believe that we've only experienced a third of the impact of all the interest rate rises we've had to date, explains ITV News' Economics Editor Joel Hills
The Bank added in its report: “Food price inflation, which has a particularly large impact on the living costs of lower-income families due to it making up a larger share of these families’ budgets, remains extremely high.”
Chancellor Jeremy Hunt said: “If we stick to the plan, the Bank forecasts inflation will be below 3% in a year's time without the economy falling into a recession.
“But that doesn't mean it's easy for families facing higher mortgage bills so we will continue to do what we can to help households.'”
Economists at the Trades Union Congress and the Institute of Economic Affairs (IEA), however, had been urging the Bank to avoid another increase help stave off a recession.
Trevor Williams, chair of the IEA's Shadow Monetary Policy Committee, said previous increases have not yet had chance to bring down prices, and "further rate rises by the Bank of England are unnecessary and could do some economic damage without lowering inflation any faster".
Shadow chancellor Rachel Reeves said: “This latest rise in interest rates will be incredibly worrying for households across Britain already struggling to make ends meet.
“The Tory mortgage bombshell is hitting families hard, with a typical mortgage holder now paying an extra £220 a month when they go to re-mortgage.
“Responsibility for this crisis lies at the door of the Conservatives that crashed the economy and left working people worse off, with higher mortgages, higher food bills and higher taxes.”
The increase was met with fury by protesters outside the Bank who believe increases are not bringing down inflation but will "deepen the suffering of households already struggling with the cost of living".
Positive Money, a not-for-profit advocacy group which helped organise the demonstration, said protesters wanted to let the Bank know they'd "had enough of senseless interest rate rises".
Hannah Dewhirst, head of campaigns at Positive Money, said: “Rate rises are failing to bring down inflation fuelled by international fossil fuel prices and food prices disrupted by climate change. They will only continue to impoverish households and enrich banks.
“What we need are better tools for dealing with inflation than blunt instruments like interest rates, and a windfall tax on bank profits to redress the harm done to workers and families by rate hikes.”
It comes amid signs that the UK economy is slowing under the weight of higher interest rates.
House prices fell at the fastest annual rate in 14 years in July, as housing affordability has been stretched for people looking to buy a home with a mortgage, Nationwide said.
The slowing market has had a knock-on effect on a number of housebuilders and builders’ merchants who have flagged much weaker demand for properties.
Furthermore, growth in Britain’s services sector slowed last month, as concerns over interest rates and the economic outlook took a toll on consumer demand, S&P Global said in its PMI survey.
Rishi Sunak said on Wednesday that inflation is not falling as fast as he would like, but people can “see light at the end of the tunnel”.
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Mr Sunak told LBC’s Nick Ferrari: “I know families are struggling with the cost of living and that’s why I set it out as my first priority to halve inflation, and we’re making progress.
“Is that as fast as I’d like? No. Is it as fast as anyone would like? No. But the numbers most recently that we had show that we’re heading in the right direction, inflation is coming down, and I think people can see light at the end of the tunnel.
“But, look, we’ve got to stick to the plan, it’s not easy to bring down inflation. It requires me to make difficult but responsible decisions on behalf of the country.
“They’re not easy, I get flak for them, but I’m going to do them because they’re the right thing for everybody in the long-term, and I’m determined to stick to the course and bring down inflation for everyone.”