In a split vote, the central bank’s monetary policy committee (MPC) voted by a 7-2 majority for the biggest rate hike since 1989 to combat inflation that hit 10.1% in September. The Bank blamed higher energy prices and a tight labor market for the decision to raise interest rates, matching hikes last week by the US Federal Reserve and the European Central Bank. The last time interest rates rose more than 0.5% was in 1989. The UK government forced a 2% increase during the 1992 Exchange Rate Mechanism crisis, albeit for less than 24 hours before it was scrapped. Without taking into account Chancellor Jeremy Hunt’s potential government spending squeeze in his November 17 Budget, which could worsen the outlook for economic growth, the MPC said the economy was already contracting and would continue to contract for eight consecutive quarters until the summer of 2024 if interest rates continue to rise as financial markets expect. The Bank expects inflation, which reached 10.1% in September, to peak at 11% by the end of 2022. The severity and duration of the recession is expected to crush consumer spending and hit business confidence, leading to a two-year recession that will be as long, if not deeper, than the Depression of the 1930s. . Conservative MPs are likely to be concerned by the forecast, which shows the economy barely picking up steam ahead of a general election expected in the second half of 2024 and the economy growing only moderately in 2025. Inflation has soared in most developed countries as the war in Ukraine reduced natural gas supplies and sent global prices soaring. Britain has been hit hard by a combination of high energy prices and a shortage of workers in several key industries, leading to concerns about rising wages. The Bank of England has accelerated its rate hikes in recent months as the impact on gas and other commodity prices from the war intensified. After the turmoil in financial markets following Liz Truss’s mini-budget, investors had expected interest rates to peak at 5.25%, but before the MPC meeting in November they had already cut the expected peak to 4.75%. The bleak forecasts are expected to be interpreted by financial markets that rate hikes will be limited next year, likely to no more than 4%. Critics of the central bank are expected to argue that further rate hikes are unnecessary when central MPC forecasts show inflation falling below its 2% target in 2024 if rates remain at 3%. The Bank’s report said: “The economy has suffered a succession of very large shocks. Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation returns to the 2% target in a sustainable manner over the medium term.” However, he added that there are many moving parts in the economic outlook, domestic and from the global economy, that make it difficult to predict economic growth next year. “There are significant uncertainties surrounding the outlook. The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond strongly as necessary.” Homebuyers with tracker or variable rate mortgages will feel the pain of the rate hike immediately, while the estimated 300,000 people due to remortgage this month will find two- and five-year fixed rates remain at unprecedented levels since the financial crisis of 2008. Ahead of the MPC meeting, the average two-year fixed rate fell to 6.47% from 6.65% in mid-October – as a result of Kwasi Kwarteng’s disastrous mini-budget easing – but remains three times the rate offered by lenders earlier this year. A five-year fixed-rate mortgage that could be bought at 6.51% on October 20 has fallen marginally to 6.31%. Mortgage payments due to be refinanced will be hit by a £3,000 a year rise in interest payments, the Bank estimates, while private rents are also expected to rise sharply following the MPC decision. The nine-strong MPC voted seven to two in favor of an increase of 0.75 percentage points, with two former LSE economics professors on the committee voting for a smaller rise. Silvana Tenreyro voted for a 0.25 percentage point increase while Swati Dhingra supported a 0.5 percentage point increase.
