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UK interest rates rise to 14-year high

Author: ICAEW Insights

Published: 15 Dec 2022

Bank of England hikes interest rates to their highest level since 2008 in an attempt to deal with soaring inflation amid the cost-of-living crisis.

The Bank of England’s Monetary Policy Committee (MPC), which sets monetary policy to meet the 2% inflation target, announced on 15 December its decision to raise UK interest rates by 50 basis points to 3.00%. This is the ninth successive time that the MPC has increased interest rates. 

The MPC was split over the decision to raise the rate to 3.5%. Six members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Huw Pill and Dave Ramsden) voted in favour of the proposition. Three members voted against the proposition. Two members (Swati Dhingra and Silvana Tenreyro) preferred to maintain Bank Rate at 3%. Catherine L Mann preferred to increase Bank Rate by 0.75 percentage points to 3.75%.

The minutes from the latest meeting suggest that more rate rises may be needed, noting that “the labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.”

Similarly, the minutes also noted: “The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.” The central bank now expects UK GDP to decline by 0.1% in 2022 Q4, 0.2 percentage points stronger than expected in the November report. 

The next announcement on interest rates is on 2 February 2023.

Responding to today’s interest rate decision by the Bank of England’s Monetary Policy Committee, Suren Thiru, Economics Director for ICAEW, said: “While the central bank has shifted to a lower gear on interest rates, this hefty rise will still be a body blow to those businesses and households already struggling with spiralling borrowing costs. 

“A year of rapidly rising rates will have inevitably taken its toll on the economy by diminishing consumer and business confidence, squeezing living standards and leaving companies with little financial headroom to invest. Policymakers must carefully consider what happens next. With inflation starting to ease as economic conditions deteriorate, the risk of tipping the UK into a deeper and more damaging recession by over-tightening monetary policy is growing.”

For further information, read: Minutes from the November MPC meeting

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