The Bank of England has raised interest rates to 1.75% from 1.25% – taking them to the highest level since January 2009 - and has warned the UK is set to enter recession this year.
The Bank's Monetary Policy Committee voted 8-1 in favour of the rise as it said higher energy prices were likely to push inflation to 13% - well above the 2% target.
In minutes from the rates decision meeting, the Bank said the majority of the MPC felt a “more forceful policy action was justified”.
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It said: “Against the backdrop of another jump in energy prices, there had been indications that inflationary pressures were becoming more persistent and broadening to more domestically driven sectors.”
“Overall, a faster pace of policy tightening at this meeting would help to bring inflation back to the 2% target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later."
The Bank said: inflationary pressures in the UK and the rest of Europe had intensified significantly since May.
It added: “That largely reflects a near-doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
“As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
“CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”
It added: “The United Kingdom is now projected to enter recession from the fourth quarter of this year.
“Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
The rates news also came on the day the Office for National Statistics (ONS) said gas prices had shot up nearly a third in the last week of July to reach the highest average cost since mid-March. The ONS said the National Grid saw the average price for gas increased by 31% to 9.8p per kilowatt hour over the week to July 31.
Ofgem also confirmed today that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”.
The regulator said the change would go “some way to provide the stability needed in the energy market”, adding: “It is not in anyone’s interests for more suppliers to fail and exit the market.”
Today also saw figures released showing UK construction firms had seen activity in the sector decline for the first time since January 2021 due to pressure from soaring costs and higher interest rates, according to new figures.
The closely watched S&P Global/CIPS construction purchasing managers’ index (PMI) scored 48.9 in July, dropping from a reading of 52.6 in the previous month. It also represented the worst reading since May 2020. Anything above 50 is considered growth.
In a poll published by Ipsos on Thursday morning, 64% of people said they were fairly or very concerned about the prospect of rising interest rates – a figure that rose to 80% among those aged 18 to 34.
Some 67% said they were worried about the value of their savings, while concern about energy bills and the rising cost of living in general reached 75% and 89% respectively.
Iain McKenzie, CEO of The Guild of Property Professionals, said people should keep a close eye on their mortgage rates.
He added: “These decisions could also affect house prices in the coming months. Over the last two years, we have seen unprecedented demand for property, which is in large part due to the ultra-low interest rates that have made getting a mortgage easier.
“As more people have wanted to get their foot on the property ladder, house prices have soared. Another consecutive interest rate rise could make potential buyers more hesitant about taking on a mortgage. If it does, we will likely see property prices cool off in order to entice more people to buy.”
Nigel Green, CEO of financial advisory firm deVere Group, said: "Due to the Bank of England passively standing on the sidelines for far too long last year when prices were already starting to surge, they are now feeling the need to aggressively rate hikes.
“It’s too hard, too late.
“Now, just as the UK is nose-diving into a recession they are slamming on the brakes, which can be expected to make the downturn of Britain’s consumer-driven economy worse, and last for longer.
“The Bank of England’s hike is harmful to the economy and piles on the pain for people and businesses across the country.”
