Bank of England interest rates: what is the latest base rate rise?

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<p>A broad view from the Bank of England, which warned that inflation will peak at 13%.  Photo: Dan Kitwood/Getty Images.</p>
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A general view from the Bank of England as it warned inflation will peak at 13%. Photo: Dan Kitwood/Getty Images.

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The Bank of England hiked interest rates in the largest single hike since 1995 and warned inflation will peak at over 13% as gas prices rise.

It also said Britain will fall into its longest recession since the financial crisis.

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The bleak outlook means household incomes are expected to fall for two consecutive years.

A general view of the Bank of England on the day of publication of the February monetary policy report, on 3rd February 2022 in London, England. Photo: Dan Kitwood/Getty Images.

What is the rate hike?

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Policymakers raised the bank’s base rate from 1.25% to 1.75% as they tried to control runaway inflation.

CPI inflation will hit 13.3% in October, the highest in more than 42 years, when regulator Ofgem raises the price cap on energy bills to around £3,450, the bank’s forecasters said.

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Energy prices will plunge the economy into a five-quarter length recession – with gross domestic product (GDP) shrinking every quarter in 2023.

“Growth thereafter is very weak in historical comparison,” the bank said on Thursday.

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What does this mean for household income?

Poor economic conditions will cause real household incomes to fall for two straight years, the first time since records began in the 1960s. They will fall 1.5% this year and 2.25% next year.

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However, the recession will at least be shallower than the 2008 crash, with GDP falling by as much as 2.1% from its peak.

Bank officials said the depth of the decline was more comparable to the recession of the early 1990s.

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Unemployment is forecast to rise again next year.

The bank said it expects inflation to regain control in 2023, falling below 2% towards the end of the year.

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“The UK is expected to enter recession from the fourth quarter of this year,” the bank’s Monetary Policy Committee (MPC) said.

“Real after-tax household income is projected to decline sharply in 2022 and 2023, while consumption growth turns negative.”

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GDP is expected to grow 3.5% this year, the bank said, downgrading its previous forecast of 3.75%. Next year it will then shrink by 1.5%, and in 2024 by a further 0.25%.

Bank of England Governor Andrew Bailey.

Meanwhile, real after-tax household income will fall by 1.5% this year and 2.25% next, it said.

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All but one member of the MPC, which sets interest rates, voted to raise the base rate by 0.5 percentage points to 1.75%.

Interest rates have thus reached their highest level since January 2009.

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The MPC said inflationary pressures have strengthened since the committee’s last meeting, mainly due to the wholesale gas price nearly doubling since May.

What has been said about energy prices?

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As this impacts energy prices, households will face significant budgetary pressures.

The bank predicts that the price cap on energy bills will rise from £1,971 to £3,450 a year for the average household in October this year.

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Experts at Cornwall Insight, an energy consultancy, have also predicted further increases to £3,616 in January and £3,729 in April. Other energy experts believe it could go even higher.

Bank of England Governor Andrew Bailey highlighted the impact of rising energy costs on the broader economic picture.

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At a press conference, he said the “further sharp rise in energy prices” was the biggest development in recent months.

“Wholesale gas futures prices for the end of this year … have nearly doubled since May,” he said.

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They are “nearly seven times higher” than forecasts suggested a year ago, he added.

“This is largely a consequence of Russia restricting gas supplies to Europe and the threat of further cuts.”

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What did the government say?

Chancellor Nadhim Zahawi said: “The UK, along with many other countries, is facing global economic challenges and I know these projections will worry many people.

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“Reducing the cost of living is a top priority and we have taken action to help people through these difficult times with our £37billion household aid package, which includes direct payments of £1,200 to the most vulnerable families and £400 Discount on energy bills for everyone.

“We are also taking important steps to bring inflation under control through strong, independent monetary policies, responsible tax and spending decisions, and reforms to boost our productivity and growth.

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“The economy has made a strong recovery from the pandemic, with the fastest growth in the G7 over the past year, and I am confident that with the actions we are taking we can address these global challenges as well.”

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