Bank of England raises interest rates to 0.5% | Interest rate

The Bank of England raised interest rates for the second time in three months, to 0.5%, as it warned that rising energy bills would push inflation higher than expected, to more 7% by April.

Warning that families faced the biggest drop in their disposable income in three decades this year, the Bank’s monetary policy committee voted narrowly to raise its base rate by 0.25% to combat against soaring inflationary pressures.

Signaling a growing split in the nine-member committee (MPC), four members voted for a more aggressive increase to 0.75% to combat rising prices and get them back to the inflation target of 2 more quickly. % form the bank.

In a pessimistic assessment of Britain’s economic outlook, Threadneedle Street predicts family disposable income will fall by 2% this year, the biggest drop since comparable records began in 1990.

The pound appreciated in international currency markets by 0.3% against the US dollar to trade at nearly $1.36. Financial markets will likely see the vote as a gauge of the central bank’s determination to take an independent stance in its inflation-reduction mission, with MPC members casting aside the negative impact that higher borrowing costs high are likely to have on the economy’s ability to grow.

All members of the committee voted to start the process of reducing the Bank’s £895 billion quantitative easing bond purchase program, which has been in place over the past decade since the 2008 financial crisis. , which was added during the Covid-19 pandemic. The MPC said it would opt not to reinvest proceeds from maturing bonds, in a process that would reduce its stock of assets by £70bn over the next two years.

The decision to raise rates to 0.5%, widely anticipated by city economists, comes after the official measure of annual inflation hit a 30-year high of 5.4% in December, an increase fueled by a sharp increase in household energy bills and supply. chain traffic jams driving up the cost of the weekly shop.

Amid rising energy prices for households, the Bank said inflation was on track to peak at nearly 7.25% in April, a sharp adjustment from its previous forecast of 6% .

The central bank said it would continue raising rates this year and next, to 1.5% by mid-2023.

Officials said rising gasoline prices were the main factor pushing inflation over the next few months to its highest level since August 1991. A tight labor market, in which wages surged in amid an increase in vacancies to record highs, was another factor pushing up prices for goods in stores, the MPC said.

The interest rate hike followed Rishi Sunak’s announcement that he would give all households a refundable £200 rebate on their energy bills in response to energy regulator Ofgem increasing the dual fuel price cap of £693 from April to £1,971 per year. . Low-income households will also receive additional support under the Chancellor’s plans.

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Illustrating the last-minute nature of Sunak’s bailout deal, the Bank was briefed ahead of the announcement, but too late for the possible impact to be included in any of its forecasts. When asked if the government’s cost-of-living rescue program had factored into its inflation forecast, Bank officials said it was only able to make a hypothesis on a possible agreement.

The MPC said uncertainty about the economic impact of the Omicron variant of the coronavirus had diminished and its consequences for jobs and growth were likely to be more limited than expected in December. Despite concerns over the new wave of the pandemic, the Bank raised interest rates from a record low of 0.1% to 0.25% in December.

However, Threadneedle Street said the economy is expected to slow over the next two years and unemployment is expected to rise. Despite the current record number of vacancies, he said unemployment is expected to fall from the current level of 4.1% to 5% in 2023, while forecasting a slowdown in GDP growth to 1.25% next year. and 1% in the 2024 general election.

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