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Highlights:
- The Bank of England has hiked the interest rates by 50 bps, the biggest in the last 27 years.
- It also raised its inflation forecast, saying it may reach 13% by the end of this year.
In its bid to tighten the noose on inflation, the Bank of England (BoE) has announced the biggest hike in interest rates ever since it became independent from the government 27 years ago. The bank has raised the rate by 0.5 percentage points to 1.75%, marking the sixth consecutive hike in the rates. The recent hike has put the interest rates to the highest levels since 2008, when a financial crisis hit the global economy.
Notably, a 50-bps hike was the general expectation from the financial markets and economists. The bank has been criticised for not doing enough to curb inflation.
What does it mean?
The move by the central bank aims to bring inflation down, which has been breaching the 40-year-old record for a few months. In June, inflation touched 9.4%, as electricity bills rose, and fuel prices flirted with record highs frequently. People are now paying significantly more than what they were paying earlier for most things.
With the latest hike, the bank has restressed its earlier commitment to bring inflation down to its target of 2%. In June, BoE governor Andrew Bailey pledged to act 'forcefully' to ensure inflation isn't embedded in the economy. However, bigger rate hikes have also landed the bank a challenging territory. While they may help in curbing high prices, the bank also risks halting economic growth or eventually causing a recession, fears for which have already been mounting.
Higher rates also mean that those who have taken any loans or mortgages on unsecured rates will most likely see a rise in their monthly interest payments, putting more pressure on their pockets. The central bank estimates that about two-fifths of mortgages will rise over the next year.
Inflation to rise later this year
Along with the interest rates, the bank also raised its inflation forecast for this year, saying it will touch 13% at its peak before the end of the year and will remain high next year as well. This is way above the BoE's 2% target and also significantly higher than the bank's earlier forecast of 11%.
Higher inflation will bring in more trouble for millions of households, especially for those in the lower-income group. Many are already digging into their savings or switching to borrowing. Discretionary spending has also come down, leading to lower revenues for several businesses like those in the hospitality sector.
UK to go into recession this year
Another crucial forecast by the bank is that the UK may slip into a recession in the last quarter of this year, and the economy will continue to contract next year. The bank added that inflationary pressures in the UK, as well as Europe, have intensified significantly. Real household income after tax too could witness a sharp decline this year and the next year. Consumption growth is also projected to land into negative territory, it said.
