The Bank of England (BoE) has announced that interest rates will be raised by 0.5%, bringing the base rate of interest to 3.5%, the highest level in 14 years.
At a meeting held on 14 December 2022, the Bank’s MPC voted by a majority of 6-3 to increase rates by 0.5 percentage points.
According to the BoE, two members had preferred to maintain the Bank Rate at 3%, while one preferred to increase it by 0.75 percentage points to 3.75%.
The further rise in rates comes as the BoE continues to curb double-digit inflation. Although UK inflation fell to 10.7% in November, down from 11.1% in October, it still remains close to a 40-year high as the cost of living continues to rise.
The BoE said that although the introduction of the Energy Price Guarantee (EPG) in October has limited the rise in CPI inflation, the contribution of household energy bills to inflation has risen further.
Since the MPC’s previous meeting, core goods price inflation has fallen back, while annual food and services price inflation has strengthened. CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison.
Meanwhile, the MPC added that although labour demand has begun to ease, the labour market “remains tight”. The unemployment rate rose slightly to 3.7% in the three months to October, while vacancies have fallen back, but the vacancies-to-unemployment ratio remains at a very elevated level.
The BoE noted that the majority of the committee believes that “should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”.
It added: “There are considerable uncertainties around the outlook. The committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
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