Full story: Sunak under pressure as Bank attaches tough message to rate rise
And finally, here’s our news story on today’s rise in UK interest rates, and the political implications:
Sunak under pressure as Bank attaches tough message to rate rise
Rishi Sunak is under mounting pressure from Conservative MPs to boost the UK’s struggling economy after the Bank of England signalled that there will be no respite from the high interest rates hitting households and businesses until well into next year.
Threadneedle Street prompted calls for tax cuts and a package of support for the housing market after it raised rates for a 14th time in a row, with the cumulative impact of dearer borrowing meaning a general election expected in late 2024 would take place against a backdrop of a barely growing economy.
The Bank announced a quarter-point increase in interest rates to 5.25% and gave a strong hint that further rises would be needed to combat inflation.
In a tough message that came as a further blow to households struggling with the highest interest rates in 15 years, the Bank said policy would need to remain “restrictive enough for long enough” to bring inflation – currently 7.9% – back sustainably to its 2% official target.
Financial markets are now assuming there will be at least one further quarter-point increase in interest rates in the coming months, and that the Bank will then leave them unchanged until late 2024 and bring them down slowly through 2025.
Sir John Redwood, a Conservative MP and former cabinet minister, argued that “targeted tax cuts would be extremely helpful” from the Treasury but said his main criticisms were directed at the Bank for lurching from low interest rates creating inflation to rates that “cause a housebuilding collapse and manufacturing recession”.
More here:
That’s all for today. Here’s our analysis of the increase in interest rates:
And here’s what it means for you:
Goodnight. GW
Afternoon summary
Time for a recap…
The Bank of England has been criticised after policymakers voted to raise UK interest rates to a new 15-year high of 5.25%.
The IPPR thinktank warned that the BoE was “overdoing it”, given the UK economy is weakening, the labour market is slowing down, and productivity is falling.
The IPPR said:
By raising interest rates to 5.25%, the Bank is tightening the screws too much and causing excessive harm for households and businesses. Interest rates might well be more than a percentage point too high now.
The IEA was also concerned, saying:
The UK economy is like a frog slowly being cooked by ever higher interest rates.
By raising the temperature further now, the Bank risks doing too much and, once again, only realising its mistake when it is too late.
And the TUC accused the government of hiding behind the Bank of England. The TUC fears that today’s rate rise will only heap more misery on households and businesses – and put many thousands more jobs and livelihoods at risk.
The Bank met City expectations today by lifting interest rates for the 14th time in a row. Its Monetary Policy Committee was split, though, with 6 members backing the 25bp rise, two voting for a larger, half-point hike, and one favouring no change.
The Bank warned that borrowing costs were likely to stay high for some time, saying:
The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target.
Governor Andrew Bailey told a press conference it was “far too soon” to speculate about when the Bank might start to cut rates, and also gave little guidance about future rate increases.
Bailey predicted that inflation will fall to 7% later this month, in July’s CPI report, and then hit 5% in October’s data – which would meet Rishi Sunak’s goal of halving inflation this year.
Chancellor Jeremy Hunt said the government must not “veer around like a shopping trolley”, and should stick to its plan of fighting inflation.
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 there were protests outside the Bank of England ahead of the announcement, with campaign group Positive Money calling for a windfall tax on UK banks.
Hannah Dewhirst, head of campaigns at Positive Money, said:
We came out today to tell the Bank of England that we’ve had enough of senseless interest rate rises.
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.
You can join our call for a windfall tax on unearned excess bank profits below here 👉https://t.co/RiYugO1HNy
— Positive Money (@PositiveMoneyUK) August 3, 2023
It only takes one minute, and politicians are starting to listen... @johnmcdonnellMP @RichardBurgon @labourlewis and @angelaeagle have all voiced support!
Resolution Foundation warned that the Bank was predicting a rise in unemployment of about 350,000.
S&P Global Market Intelligence warned that high interest rates would push the UK into a shallow recession.
The financial markets lowered their forecasts for the peak in UK interest rate to below 5.75%.
Markets are now trimming back their expectations for the likely peak in UK interest rates, following today’s @bankofengland announcements.
— Ed Conway (@EdConwaySky) August 3, 2023
Yesterday these charts were pricing in a peak of 5.8% or so. Now down to 5.65% or so… pic.twitter.com/zNPV0inaI0
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