Cost of living crisis: Bank of England expected to hike interest rates

Be the First to Comment Read

Cost of living crisis: Bank of England expected to hike interest rates

Follow us on Google News:
 Cost of living crisis: Bank of England expected to hike interest rates
Image source: Shutterstock.com

Highlights

  • Britons and economists are expecting the Bank of England’s Monetary Policy Committee (MPC) to hike interest rates again on Thursday to curb the pressure of surging inflation.
  • Energy regulator Ofgem has said that the energy price cap will increase by £693 from April.
  • The Bank of England (BOE) raised interest rates from 0.1% to 0.25% in December 2021.

In a bid to curb the pressure of surging inflation, the Bank of England’s Monetary Policy Committee (MPC) is expected to hike interest rates again on 3 February (Thursday.) This would be the first back-to-back hike in interest rates since 2004.

The Bank of England (BOE) raised interest rates from 0.1% to 0.25% in December 2021 to lift borrowing costs from their pre-pandemic lows and is expected to raise interest rates further by 25 basis points to 0.5% on Thursday. Further, it may hike the rate by 1% in summer, and 1.25% by the end of 2022.  

The UK’s inflation rate surged unexpectedly to 5.4% in December 2021 up from November’s 5.1%, since its highest in 1992. The sharp rise in inflation rate is largely due by rising fuel and energy costs, Brexit, strong demand for goods and services, and supply chain crises, according to Office for National Statistics (ONS).

In April, the inflation rate is expected to rise by 6% with a further increase in energy bills, enhancing pressure on both household and businesses.

According to the ONS report, two-third of households are struggling with rising living costs.

© 2022 Kalkine Media®

On the other hand, Energy regulator Ofgem has declared that the UK energy price cap will be raised by 54% to £1,971, which would mean prices will increase by £693 from 1 April 2022 and would affect nearly 22 million customers.

According to the ONS report, two-third of households are struggling with rising living costs, and 8 in 10 are under pressure of rising energy bills. The Bank of England data reveals that credit card spending is on the rise.   

Also Read: How would inflation further affect sectors? 5 pointers to note

Higher Interest Rates

The Bank of England usually raises interest rates to tackle the rising inflation, which means the monthly payments on borrowing will go up, especially on the loans tied to the Bank of England’s rates. The high-interest rates make debts expensive for households and businesses, which reduces economic growth and may lead to a recession.

Businesses that have taken debts will now have to pay more interest on their borrowings with increasing raw material and energy costs, which will reduce their earning capacity. 

The high-interest rates make debts expensive for households and businesses

© 2022 Kalkine Media®

Also Read: UK stock market moves up ahead of interest rate decision

Other expectations

Investors will also look at any decision of quantitative easing, where the BoE has committed to give £895 billion to its asset purchase facility from banks and pension funds. Of which, £875 billion are in gilts and £20 billion in corporate bonds to infuse liquidity in the economy. The bank may soon start selling back these bonds.

When the interest rate hits 0.5% and reinvestments in the bank’s balance sheet reduce from next week, the central bank’s Monetary Policy Committee may consider quantitative tightening programme.

Disclaimer

Featured Articles