Interest rates rise to 1% as bank gives warning

THE Bank of England has hiked interest rates to 1% as it warned the economy will go into reverse and that inflation will peak at more than 10% as the Ukraine war compounds a crippling cost of living crisis.

Members of the Bank’s nine-strong Monetary Policy Committee voted 6-3 to increase rates from 0.75% to 1% – the fourth time they have voted for a rise in a row and taking rates to a level not seen since 2009.

Three members called for a bigger increase to 1.25% due to worries over rocketing inflation, with the Bank ramping up its forecast for Consumer Prices Index (CPI) inflation to rise from 7% currently to more than 10% in October – its highest level for 40 years – due to soaring energy prices.

The Bank predicts growth will contract in the final three months of 2022 as the cost squeeze sees households rein in spending.

The UK is set to narrowly miss a technical recession, as defined by two quarters in a row of falling gross domestic product (GDP), but the Bank forecasts very weak quarterly growth in 2023 and a contraction as a whole next year, with GDP falling by 0.25% and unemployment picking up as cost pressures hit.

The prediction for growth in 2022 remains unchanged at 3.75%, although the Bank also slashed its growth outlook for 2024 to 0.25% from the 1% it predicted.

Sky-high inflation will see household disposable income plunge by 1.75% this year – the second highest on record – while overall real income will tumble by an unprecedented 3.25% this year and fall again in 2023 before beginning to recover, the Bank cautioned.

In minutes of the latest decision, the Bank said further rate hikes will likely be needed to cool rampant inflation.

It said: “The UK economy had recently been subject to a succession of very large shocks and disturbances. Russia’s invasion of Ukraine was another such shock.”