Bank of England raises UK interest rates to 4%,
Feb 2, 2023
The Bank of England has blamed the inflationary impact of higher than expected wage rises for an increase in interest rates from 3.5% to 4%, piling more pressure on mortgage payers and businesses struggling to pay off their loans.
Amid calls from unions for higher wages to protect against the worst falls in living standards for 100 years, a majority of the Bank’s monetary policy committee (MPC) said the 0.5 percentage point rise was needed after a jump in private sector wages above the central bank’s previous forecasts.
Marking its 10th consecutive rate increase, the Bank said the economy would enter a shorter and shallower recession than it predicted last year – with output falling by 1% from peak to trough compared with a 3% drop it said in November.
Bank staff now expected GDP to have grown by 0.1% in the final quarter of 2022, stronger than predicted in November. That would mean the UK did not enter a technical recession in 2022, as previously thought after the economy shank by 0.3% in the third quarter.
The UK economy is forecast to shrink in each quarter of 2023 and the first quarter of 2024 before staging a modest recovery.
The Bank said the hit to trade from Britain was being felt sooner than previously expected. “The effects of Brexit on trade are now estimated to be emerging more quickly than previously assumed, and that lowers productivity somewhat,” it said.
The 0.5-point increase was forecast by City analysts, who expect the Bank to raise interest rates again to 4.5% in the spring before a series of cuts next year brings Bank rate back to 3.5%.
More than 1.5 million mortgage payers are expected to suffer an average £3,000-a-year increase in interest payments when they refinance their loans this year as well as the hundreds of thousands of households that refinanced at higher rates in 2022.
Monthly bills for households in the rental sector have rocketed, with landlords blaming higher borrowing costs for the rises.
Two members of the nine-member MPC voted to keep rates at 3.5%, arguing that the effects of previous rates rises had yet to feed through into the wider economy.
Silvana Tenreyro and Swati Dhingra, both seconded from the London School of Economics to the MPC, have repeatedly warned that the central bank underestimates the impact of previous interest rate rises and should pause to judge the effects on mortgage holders, renters and small businesses before taking further action.
The MPC’s majority view was that it would “continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation”.
In a warning to workers, it said if there was evidence of “more persistent pressures, then further tightening in monetary policy would be required”.
The Bank expects the headline rate of inflation to fall rapidly this year from December’s 10.5% to 3.5% by the end of the year, and then 1% in 2024. The Bank has an inflation target of 2%.
The MPC said GDP would only reach its previous peak in 2019 by 2026, indicating that a combination of staff shortages fuelled by the Covid-19 pandemic and Brexit combined with high energy prices had reduced the economy’s capacity to grow.
After the turmoil in financial markets that followed Liz Truss’s mini-budget, investors forecast interest rates peaking at 5.25%, but the highest they expected before today’s meeting was 4.5%.
Private sector wages increased by 7.2% in the three months to November, according to official figures that show the highest rises going to workers in the financial services sector and business services such as accountancy and the legal industry. Most negotiated wage rises are about 4%, according to industry surveys.
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