The Bank of England has hiked interest rates to a new 14-year-high.
Despite inflation easing last month, decision-makers said on Thursday (December 15) that they are increasing interest rates from 3 percent to 3.5 percent. It is the ninth time rates have been raised since late last year as the Bank tries to get inflation under control.
By increasing interest rates, people borrow and spend less money. This slows the economy down and means companies can't put their prices up as quickly.
Read more: What the inflation rate drop means for cost of living, interest rates and your bills
The Bank of England website explains: "We know that higher rates will be hard for people. But it’s better for everyone in the long run to have low and stable inflation. We need to raise rates to achieve that. Otherwise, the problem will get worse and, in the end, we’d need to raise interest rates by even more."
The Monetary Policy Committee (MPC), which sets interest rates, said a “forceful” policy response was justified as the labour market remained tight across the month. There are also signs that inflationary pressures could stick around for longer than thought, it said.
Most of the MPC’s nine members agreed that they would continue to vote for rate rises if the economy broadly continues to develop as the committee expected when it last met a month ago. “The majority of the committee judged that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank rate might be required for a sustainable return of inflation to target,” the Bank said.
On Wednesday (December 14), the Office for National Statistics (ONS) revealed that inflation had reached 10.7% – slightly lower than expectations and a reduction from the 41-year high seen in October. The MPC is tasked with trying to get inflation under control, to 2 percent if possible.
The dip in inflation has come as little relief for households and businesses, who are still facing eye-watering prices across the board. Costs of everyday items remain high, with food inflation hit a 45-year high last month of 16.4 percent, while power costs remain elevated.
Energy bills will go up again in April when the Energy Price Guarantee headline figure of £2,500 a year for the typical household rises to £3,000. Many economists expect the UK to be in a recession throughout 2023.
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