Rise in interest rate will pile on cost crisis pain

THE Bank of England is set to hike its base rate by a quarter point to 1 per cent on Thursday, in a bid to try to tame soaring inflation.

However, economists warn that the expected hike from the Bank’s Monetary Policy Committee will add to the existing squeeze on household finances, by raising the cost of loans and mortgages.

If the MPC does hike its base rate, it will be the fourth increase since December 16, when it moved the rate from 0.1 per cent to 0.25 per cent. It is raising the base rate in the hope that it causes consumer spending to fall and in turn, reduces the growth in prices and lowers inflation.

The CPI inflation rate is currently 7 per cent and it is believed it shot past 8 per cent last month.

Resolution Foundation research director James Smith said when the base rate hike feeds through into higher mortgage and loans costs, it will mostly hurt lower income households, which are struggling to keep up with prices rising at their fastest rate in 30 years.

“With ONS data showing wages not keeping pace with rising prices, Britain’s cost-ofliving crisis – on track to be the biggest squeeze since the mid70s – will continue to worsen before it starts to ease at some point next year,” he said.

Martin Beck, chief economic adviser to the EY ITEM Club think tank, said with the base rate at 1 per cent, it has reached the Bank’s threshold to start unwinding quantitative easing.

However, given the uncertain economic outlook, he said the MPC may wait rather than immediately start withdrawing QE stimulus: “A move to quantitative tightening would be a step into uncharted waters.”

The inflationary pressures weighing on the economy are reflected in new data from EY, which shows that stock market listed companies issued 72 profit warnings in the first quarter, up from 50 for the same period last year.

It said a record 43 per cent of the warnings were due to rising costs, compared to the 10 per cent average over the past decade.