March 23, 2023 at 12:01 GMT
Updated 22 minutes ago
image source, Getty Images
Interest rates have been raised to their highest level in 14 years to curb the rising cost of living.
The Bank of England’s decision to hike interest rates to 4.25% from 4% comes after figures showed that the cost of living has risen more than expected.
Prices rose faster than expected last month, driven by a sharp rise in food costs.
The rate hike comes amid ongoing concerns about the global financial system after two US banks failed.
The bank has been constantly raising interest rates to cope with the rising cost of living.
Inflation, the rate at which prices are rising, remains near its highest level in 40 years – more than five times what it should be.
The bank voted to raise its benchmark interest rate to a new 14-year high after inflation rose “unexpectedly”, but said rate hikes “are likely to taper off sharply over the remainder of the year”.
Its rate-setting policy committee voted in favor of the latest hike by a seven-to-two majority, with the bank saying “cost and pricing pressures remain elevated”.
This means that mortgage costs can increase for some homeowners and some savers can earn better returns.
The bank warned that the extent to which inflation eases in the coming months would depend on “how the economy evolves”, including the impact of its past rate hikes.
But in line with the government’s official independent forecaster, the bank said the UK was no longer headed for an immediate recession, adding that the UK economy will grow “modestly” in the coming months, rather than contracting as previously forecast.
The bank noted in its report that since the collapse of Silicon Valley Bank in the US and in the run-up to UBS’s state-backed takeover of troubled Swiss bank Credit Suisse, there have been “large and volatile moves in global financial markets”.
“The economy has faced a series of very large and overlapping disruptions,” the bank said.
But it said it believes the UK banking system has remained “resilient” following the recent turmoil.
The bank warned that if inflation persists, more rate hikes could follow, but said the rate of inflation will “still slow down significantly” in 2023, largely due to the government’s easing of support for household energy bills stretches to remain typical household bills of £2,500 a year and falls in wholesale gas prices.
Economists also believe inflation will fall in the coming months as energy prices fall as temperatures warm.
The UK inflation rate is currently higher than any other advanced world economy, with prices up 10.4% through February, in contrast to the US and the Eurozone, where inflation rose to 6% and 8.5% respectively has declined.
The bank even went so far as to say that the contribution of energy prices to headline inflation would turn “negative” by the end of this year. High energy prices were the main driver last year, with gas and oil prices soaring after the Russian invasion of Ukraine.
But other factors such as labor shortages and food costs have also fueled price increases.
On Wednesday, official figures showed that the recent rise in UK inflation was due to lettuce and vegetable shortages, which pushed up food prices.
Food inflation hit 18.2% and is now the fastest in 45 years.
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