Borrowers brace for rate rise as inflation hits 5.1%

... and experts predict 30-year high by spring

THE Bank of England today faces a knife-edge decision over interest rates after the highest rise in the cost of living for a decade.

inflation rocketed to 5.1 per cent in november – the steepest increase since september 2011 – with the cost of food, clothing, fuel and used cars all spiralling.

The figures came a day after the international monetary Fund predicted that UK inflation would hit 5.5 per cent next spring – a 30-year high which would push many household budgets to breaking point. The IMF warned the Bank against ‘inaction’.

Bank officials will announce their decision on whether to increase rates today. The base rate has been 0.1 per cent since the first pandemic lockdown in march last year.

Rising prices are piling pressure on the Bank to raise rates – hitting borrowers – but a hike could derail the UK’s fragile economic recovery from Covid. The Bank usually raises the base rate when inflation jumps over the 2 per cent target. Higher rates prompt families and firms to save rather than spend, helping to keep a lid on prices.

But with fears over the omicron Covid variant keeping workers and Christmas revellers at home, economists on the Bank’s rate-setting monetary Policy Committee are worried a hike could halt the recovery. Experts were divided last night over how the Bank should proceed.

Julian Jessop, of free market think-tank the institute of Economic Affairs, said the Bank’s ‘credibility is on the line if they fail to act now to keep inflation expectations in check’. He added: ‘The new uncertainty created by omicron is not necessarily a good reason to leave interest rates on hold. omicron seems more likely to add to inflation pressures by further disrupting supply chains than to reduce them by dampening demand.’

But Yael selfin, chief economist at accountancy firm KPMG, said: ‘We expect the Bank of England to adopt a wait-and-see approach at this week’s meeting, allowing for more time to assess the net impact of the omicron variant on growth and inflation.’

Transport added the most to november’s inflation rate, as the price of fuel and second-hand cars shot up, according to the office for national statistics.

The average cost of petrol hit an all-time high of 145.8p per litre in november, up from 112.6p a year earlier.

And used cars have been climbing in price because of a shortage of electronic chips used in new vehicles, which has limited their supply.

inflation in food, clothing and household goods prices was also higher than normal.

The general rise in prices has been driven up by the chaos caused by the pandemic which saw firms struggle to recruit staff post-lockdown.

‘Credibility is on the line’