Interest rates increase to 4% but shorter recession forecast
The Bank of England has raised interest rates from 3.5%
Interest rates have been raised for the tenth time in a row by the Bank of England.
The Bank’s Monetary Policy Committee (MPC) increased the base rate from 3.5% to 4%, in an effort to bring down double-digit inflation.
It's another rise for many mortgage borrowers though, as variable mortgage rates use interest rates as a base.
A shorter and shallower drop forecast
The Bank said that the UK is still headed for a recession, but stressed that the economic downturn could be shallower and shorter than previously expected.
Peak-to-trough gross domestic product (GDP) is set to shrink to 1%, from around 3% in an earlier forecast.
This is because wholesale energy prices have fallen significantly since the MPC produced its last forecast, in November, and inflation has begun to fall from its peak last year.
The UK will suffer a recession of five consecutive quarters, starting in the first three months of 2023.
Output will not return to pre-pandemic levels until 2026, the Bank thinks.
Lib Dems call it a 'hammer blow' for families
Liberal Democrat Leader Sir Ed Davey said the latest rise in interest rates by the Bank of England is a “hammer blow” for families struggling with the cost of living crisis .
He said: “This is a hammer blow to hardworking families across the country. Today’s decision to hike mortgage rates has added fuel to the fire of this cost-of-living crisis.
“The blame lies squarely with the Conservative Government whose botched budget last year sent mortgage rates spiralling.
“Their complete failure to get inflation down has led to homeowners paying the price.”
Chancellor backs the rate rises
Chancellor Jeremy Hunt has said he supports the latest rise in interest rates by the Bank of England
“Inflation is a stealth tax that is the biggest threat to living standards in a generation, so we support the Bank’s action today so we succeed in halving inflation this year,” he said.
“We will play our part by making sure Government decisions are in lockstep with the Bank’s approach, including by resisting the urge right now to fund additional spending or tax cuts through borrowing, which will only add fuel to the inflation fire and prolong the pain for everyone.”
Cost of living crisis
Interest rates and inflation go up
Inflation rose by 8.8% in the 12 months to January 2023, down from 9.2% in December 2022. With interest rates also rising to 4%, those saving money will earn more interest on their finances, whilst those paying mortgages would pay more interest to the bank.
Energy bills
The price of energy went up incredibly as the cost of living crisis hit, with the gas price spike caused largely by the war in Ukraine. The price cap - which is set by an independent regulator to help offset costs onto customers - was set to rise to ÂŁ3,549 for an average home in October but a price freeze from the government restricted the typical bill to ÂŁ2,500. That's still an increase of 27% from the previous energy cap and as it's a cap on unit cost, the more energy you use the higher your bill will be.
Food prices
The cost of a weekly shop also has gone up as a result of the cost of living crisis. As a result of the war in Ukraine, a number of products including cooking oils and wheat have been disrupted. This means that several products are now considerably more expensive, driving bills up for customers.
Prices at the pumps
The average cost of petrol has also rose to unprecedented levels. Supply lines for petrol have been thrown into doubt as a result of the war in Ukraine, as Russia is a large export partner for gas, oil and fuel. In April 2022, the average price for a litre of petrol on the forecourt was 160.2p, whilst a litre of diesel would cost 170.5p. By late June 2022 the price had risen to an average of 190.9p for a litre of unleaded and 198.9p for a litre of diesel. In March 2023 the price wass on average of 147.03 in petrol and 167.04 in diesel.
Average cost of filling up a car with petrol hits ÂŁ100
On 9th June 2022, the average cost of filling up a car with petrol hit ÂŁ100 for the first time ever. Diesel had already hit that milestone. It comes as the cost of fuel hit a record high of one pound eighty a litre. The 2p rise was the biggest daily jump in 17 years. Prices have dropped by at least 20p per litre since the high point.