The Bank of England has announced a further increase in its base interest rates and issued a stark warning on the UK economy in the near-future.
Interest rates have increased by a further 0.25 percentage points to 1%, the highest level since 2009 at the height of the global financial crisis. The decision follows a previous increase to 0.75% in March.
Economists on the central bank’s Monetary Policy Committee (MPC) voted 6-3 in favour of the increase, which is set to increase the cost of borrowing in a bid to curb rising inflation which is being driven by rising fuel prices, the ongoing conflict in Ukraine, global supply chain disruption in the wake of Covid-19 as well as local disruption due to regulations pertaining to the UK’s exit from the EU.
In a stark warning of growing difficulties for the economy, the Bank of England has updated its projections on inflation and expects it to reach double figures for the first time since the 1980s before the end of the year, and well above the bank’s target of 2%. The projection that inflation could top 10.25% represents a doubling in the rate of price growth that was predicted by the Bank of England in its last assessment.
The bank also reined in their projections for growth in the UK economy, expecting annual GDP growth for 2022 within the range of 1.25% and -0.25%. Its economists are predicting the economy to shrink by 1% in the final quarter of the year and is attributing the recession risk to the ongoing squeeze on household finances which is set to tighten further when Ofgem’s energy price cap is next updated in October.
Momentum in the labour market however remained one positive identified by the Bank of England, with unemployment continuing to fall since its previous interest rates decision, and businesses across the continuing to express strong hiring intentions.