finance

Interest rates – live: Bank of England confirms rise to 1.75% as inflation to hit 13%


<p>A bigger hike in interest rates is on the cards for August, according to experts </p>

A bigger hike in interest rates is on the cards for August, according to experts

(PA Wire)

The Bank of England has hiked the interest rate to 1.75 per cent in the biggest increase for 27 years.

The cost-of-living crisis will continue throughout next year and only begin to ease in 2024, with the UK economy contracting for five consecutive quarters, according to the Bank’s latest forecasts

Inflation is set to surge to 13.3 per cent this winter when soaring gas prices mean that consumers face average energy bills of £3,500 – up from £1,200 a year ago – the Bank said.

Households face the longest and sharpest fall in living standards on record as energy bills triple and the UK plunges into a deep and protracted recession, the Bank of England has warned, in one of its bleakest ever assessments of the economy.

The Resolution Foundation think tank has warned that next year inflation could reach an “astronomical” record-high of 15 per cent – the highest level since 1980.

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Liz Truss, the frontrunner to be the next prime minister, has said she will look at the Bank of England’s mandate to make sure it has a “tight enough focus on the money supply and on inflation.”

Bank of England governor Andrew Bailey told a press conference the mandate set in 1997 was “price stability” and the chancellor then sets the target.

“That’s a somewhat different structure to many other countries,” he said.

“The great virtue of our system is it is very clear what the target is.

“But I also make the point that the structure was set up with a very clear mandate of price stability.”

(PA)

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Bank of England governor avoids Tory leadership question

Bank of England governor Andrew Bailey sought to steer clear of the Tory leadership contest and Liz Truss’s plans for immediate tax cuts.

He told a press conference: “It’s not for the Bank of England to get involved in the leadership election that’s taking place for the leader of the Conservative Party and the next prime minister.”

He added: “I look forward to working with whoever the next prime minister is and I’m sure there will be a budget and fiscal policy will be announced, but at this stage I’m not going to go any further than that in commenting on what might or might not happen.”

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‘Economic cost to the war in Ukraine,’ Bank of England governor says

Bank of England governor Andrew Bailey has said there is an “economic cost to the war” in Ukraine, but insisted it will not deflect the Bank from “setting monetary policy to bring inflation back to the 2 per cent target”

He told a press conference: “There is an economic cost to the war. But I have to be clear, it will not deflect us from setting monetary policy to bring inflation back to the 2 per cent target.”

The Bank of England governor went on: “Domestic inflationary pressures have also remained strong. Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rise in their costs.

“The labour market remains tight with the unemployment rate of 3.8 per cent in the three months to May and vacancies at historical high levels.

“The tightness of the labour market partly reflects the fall in the labour force since the start of the pandemic, which is in part due to the large rise in economic inactivity shown by the orange bars in this chart.

“As a result, and consistent with the latest agents’ survey, underlying nominal wage growth is expected to pick up further.”

(Copyright 2022 The Associated Press. All rights reserved.)

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Bank of England governor Andrew Bailey highlighted the impact of soaring energy costs on the wider economic picture.

At a press conference he said the “further sharp increase in energy prices” had been the biggest development in recent months.

“Wholesale gas futures prices for the end of this year… have nearly doubled since May,” he said. They are “almost seven times higher” than forecasts had suggested a year ago, he added.

“That’s overwhelmingly a consequence of Russia’s restriction of gas supplies to Europe and the risk of further cuts.”

(PA)

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How will savings be impacted by latest interest rate hike?

Aileen Robertson, Head of Savings at Atom bank commenting on the impact the rise in interest rates will have on savers said high levels of inflations are still likely to erode savings despite interest rate increases.

“The move from the Bank to increase the base rate by a further 0.5 per cent is intended to curb inflation (which is currently 9.4 per cent) to the target level of 2 per cent – whilst this is the biggest interest rate hike in 27 years, it’s still unlikely to do that. High levels of inflation erode the value of savings, so if you’re putting money away for the future – you need to get the best interest rate you can,” Ms Robertson said.

“Put simply, higher interest rates mean that savers get more reward for saving and that borrowing money becomes more expensive. This move should be good news for savers, but it’s up to banks to decide how much of the increase they pass on to customers. Savers have had it rough for a long time, and traditional high street banks have done very little to support them for many years as they continue to offer rock bottom rates to savers.

“I would recommend keeping a close eye on your bank’s reaction to this change and shopping around to ensure you’re getting the best rate. Blind loyalty to your bank through this difficult period can leave you worse off in the long-term, so it pays to look for a better deal.”

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Pound drops as Bank of England hikes interest rates

The value of the pound dropped 0.05 per cent lower against the US dollar at 1.211 shortly after the Bank of England’s rate rise was confirmed, having been 0.7 per cent higher ahead of the announcement.

The pound has dropped 0.5 per cent against the euro to 1.189.

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said: “Sterling has fallen fairly sharply against its major peers so far this afternoon following a very doom and gloom assessment of the UK economy from the Bank of England. The vote on interest rates was actually rather hawkish, with eight of the nine MPC members in support of an immediate 50 basis point rate increase. Silvana Tenreyro was the lone dissenter in favour of a standard 25 basis point hike.

“Of particular concern is the bank’s appraisal on the impact of the cost of living crisis on economic activity. Policymakers now expect the UK economy to contract throughout all of 2023, with a peak-to-trough fall of more than 2 per cent. This is a far sharper downturn than market participants had accounted for, hence the initial knee-jerk sell-off in the pound.”

(Getty Images)

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Inflation to soar to over 13%, bank forecasts

Consumer Prices Index inflation will hit 13.3 per cent in October, the highest for more than 42 years, if regulator Ofgem hikes the price cap on energy bills to around £3,450, the Bank’s forecasters said.

The energy price will push the economy into a five-quarter recession – with gross domestic product (GDP) shrinking each quarter in 2023.

“Growth thereafter is very weak by historical standards,” the Bank said on Thursday.

The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s. They will drop by 1.5 per cent this year and 2.25 per cent next.

However, the recession will at least be shallower than the 2008 crash, with GDP dropping up to 2.1 per cent from its highest point.

Bank officials said that the depth of the drop is more comparable to the recession in the early 1990s.

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Interest rate hike ‘no match’ against current inflation, experts warn

Experts have warned that the Bank of England’s latest interest rates hikes will be “no match against the current inflation.”

Colin Dyer, Financial Planning Expert at abrdn said: “While a higher-than-normal rate increase to 1.75% will be welcomed by savers, it’s still no match against the current 9.4% inflation.

“There is an undeniable financial pressure on cash-strapped households that will continue to mount in the months to come, with soaring energy, food and fuel prices showing no signs of slowing. A 0.5 per cent rate rise won’t be enough to balance this out.

“This is why savers need to take matters into their own hands. Considering strategic ways to grow the money they have is crucial, whether that’s by speaking to an expert about options available or reviewing if it is time to accept some investment risk. This will be particularly key for retirees relying on cash savings who will be seeing their savings loose real term value against rising inflation.”

Richard Ollive, specialist financial adviser at Wesleyan added that the increase will have a profound impact on homeowners.

“Figures show that just over a fifth of all mortgage holders in the UK are on variable rate deals, meaning around 1.9 million homeowners will be hit with a rate rise, and potentially end up paying hundreds of pounds more in annual repayments,” Mr Ollive said.

“As a result, many of those will now be looking at their deals – possibly for the first time in a long time – and considering whether they would be better off remortgaging for a fixed deal instead. While nobody can predict what will happen next with any certainty, speaking to a professional adviser is always good advice before making any long-term financial decisions.”

(PA Archive)

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Government must get grip on inflation, Rishi Sunak warns

Tory leadership hopeful and former chancellor Rishi Sunak said: “One of the most urgent challenges we face as a country is getting inflation under control as quickly as possible.

“The Bank has acted today and it is imperative that any future government grips inflation, not exacerbates it.

“Increasing borrowing will put upward pressure on interest rates, which will mean increased payments on people’s mortgages. It will also make high inflation and high prices last for longer, making everyone poorer.

“As prime minister I would prioritise gripping inflation, growing the economy and then cutting taxes.”

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Economic situation could ‘worsen’ if energy prices increase

The cost-of-living crisis will continue throughout next year and only begin to ease in 2024, with the UK economy contracting for five consecutive quarters, according to the Bank’s latest forecasts

Inflation is set to surge to 13.3 per cent this winter when soaring gas prices mean that consumers face average energy bills of £3,500 – up from £1,200 a year ago – the Bank said.

The inflation forecast was up sharply from the 9.4 per cent predicted just two months ago, with prices now on track to continue rising rapidly throughout 2023.

The Bank’s Monetary Policy Committee (MPC) warned that there was “exceptionally large” risk around its latest projections, and the situation could deteriorate further if gas prices move higher still.



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