The Bank of England has intensified the squeeze on household finances with its first back-to-back interest rate rise since 2004 as the central bank forecast inflation will increase to 7.25 per cent in April.
By a majority of five to four, the Bank’s Monetary Policy Committee voted to increase the cost of borrowing on Thursday from 0.25 per cent to 0.5 per cent. The minority wanted an even larger increase to 0.75 per cent to get a grip on surging inflationary pressure.
The rise in official interest rates alongside the highest rate of inflation for more than 30 years would squeeze disposable household incomes by 2 per cent this year, with a further 0.5 per cent hit in 2023. That would be the biggest annual reduction in spending power since at least 1990, BoE officials said.
This pain would depress spending and reduce the UK growth rate to a crawl of around 1 per cent a year. However, the pain for households would help bring inflation down towards the Bank’s 2 per cent target within two years, the MPC said.
In an effort to increase the power of monetary tightening and bear down on inflation, the MPC voted unanimously not to reinvest any of the £875bn of government bonds it has bought under quantitative easing programmes when they mature.
It will also complete a sale of the £20bn of corporate bonds it holds as part of the £895bn total QE programme, built up since 2009 by the end of 2023.
The MPC did not take the government’s package of support for energy bills into account when it set interest rates, officials said, but they added that this would not have had a material effect on its interest rate decision.
The pound climbed following the decision, which had been broadly anticipated by investors. Sterling was up 0.3 per cent against the dollar at $1.361.
UK government bond prices fell after the BoE said it would begin to reduce the stock of gilts it holds. The 10-year gilt yield climbed 0.06 percentage points to 1.30 per cent.