Bank of England raises base rate of interest to 1%
Posted on 12 May 2022
In an attempt to contain the current surging inflation, the Bank of England has raised the base rate of interest to 1%, the highest increase the UK has seen in more than a decade.
Bank of England has issued a warning last week that the country’s economy is heading towards recession which will likely last until the end of 2023. Russia’s invasion on Ukraine has caused an unprecedented squeeze on household incomes and a skyrocketing energy price crunch.
Despite this nation-wide scale economic stress, the Bank’s Monetary Policy Committee voted in favour of increasing the interest rate to the highest level of borrowing costs since 2009.
Unsurprisingly, Governor of BoE, Andrew Bailey, predicted that significant hardship will be put on the least well-off. Amongst the many adverse impacts, the Bank forecasts that unemployment could reach the rate 5.5% by 2025.
Further, real household disposable income and real post-tax labour income will fall sharply by 1.75% throughout this year, especially due to the rise of energy bills. The energy price cap applicable from 1 April to 31 September will see an increase of 54%, lifting the cap to £1,971 per annum. For reference, the wholesale price of gas makes up approximately 36% of energy bills. The variation of the wholesale price is thus significant in determining the cost of energy expenses.
Earlier this month, the Treasury was understood to have begun working on a £6 billon loan scheme which would allow energy suppliers to pass on a rebate of around £200 to each energy customer. Energy suppliers would then be bound to repay this loan one the price of gas fall by keeping the bills higher to distribute the cost across customers. Ofgem has seemingly approved a private loan scheme between suppliers and Barclays in addition to government efforts. The Cabinet is said to be in talks regarding cutting the 5% VAT and other taxes to mitigate the rise of energy bills.
Still, the wholesale price of gas is not expected to fall down any time soon.
BoE also predicts that next year’s gross domestic product growth will either be weak or negative. Currently, this is expected to fall down to -0.25%.
UK Finance estimates that 25% of mortgage are currently on variable rate, meaning that effectively 2.2 million homeowners will be impacted by the inflation. Online mortgage broker Trussle expects annual home loan payments to rise by £340.56. When cumulating the rate increases from last year, annual payments could reach a surplus of £1,300. The remaining 75% of homeowners will only be affected at the end of their fixed term agreement.
Never seen since the early 1980s, the Bank’s forecast shockingly predicts that the rate of inflation will reach 10.25% by the end of this year – as opposed to the 5.75% announced in 2021. This is the first major level of inflation in nearly four decades and the first occurrence since Bank of England was conferred discretionary power to set monetary policy in 1997.
In response to the MPC, the UK financial market was hit by a depreciation of the GPB which amounted to more than a cent against both EUR and USD.
BoE has announced that following the MPC’s resolution, it would begin reversing quantitative easing – the process by which the Bank had created money to purchase massive amounts of bonds to bolster the national economy since the financial crisis.