As the Bank of England struggles to contend with soaring price inflation, interest rates have been hiked again.
The Bank’s Monetary Policy Committee voted by 8 to 1 to hike interest rates from 0.5% to 0.75% this month, which means they are now at their highest level since before the onset of the pandemic.
It’s the third successive interest rate increase from the Bank of England in response to rapidly rising price inflation, with price rises threatening to get out of control.
Before Russia invaded Ukraine, the cost of goods and services was already rising quickly, but additional supply chain issues prompted by the war will inevitably push prices far higher.
While not publishing a formal inflation report this month, the Bank has warned that price inflation could exceed 8% in the coming months.
They explained that the Russian invasion of Ukraine has “led to further large increases in energy and other commodity prices including food prices.
“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly.”
In the twelve months to January, the Consumer Prices Index (CPI) measure of price inflation rose to 5.5% at its fastest pace for 30 years.
The Bank of England targets CPI inflation at 2% and can use interest rates as a mechanism to cool down an overheated economy.
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However, with inflation primarily driven by wholesale energy prices, it seems unlikely that a higher cost of borrowing in the UK will make much difference to prices.
According to the Bank, the rising cost of living and robust employment data are the critical reasons for this latest interest rate hike decision.
The Committee believed that an interest rate rise was justified “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 Bank’s policymakers also warned that price inflation could rise into double-digits later this year if energy prices continue to increase and mean the next review of the energy price cap, in October, is significantly higher.
