UK interest rates have risen further as the Bank of England attempts to stem the pace of soaring prices. Rates have increased from 1% to 1.25%, the fifth consecutive rise, pushing them to the highest level in 13 years. It comes as finances are being squeezed by the rising cost of living, driven by record fuel and energy prices. Inflation – the rate at which prices rise – is currently at a 40-year high of 9%, and the Bank warned it could surpass 11% later this year.
The Bank said rising energy prices were expected to drive living costs even higher in October, but added it would “act forcefully” if necessary should inflation pressures persist. Capital Economics speculates that the Bank could eventually have to raise interest rates to 3%. One way to try to control rising prices – or inflation – is to raise interest rates. This increases the cost of borrowing and encourages people to borrow and spend less. Higher interest rates also motivate people to save more.
Meanwhile, some businesses believe rising borrowing costs may curb customer spending. “At the moment we’re not seeing it directly but we know we are a luxury,” Julie Dalton, managing director of Gulliver’s Theme Park Resorts told the BBC. “Past experience has told us when interest rates go up we do start to suffer.”
Six of the nine members of the Bank’s Monetary Policy Committee voted to raise rates to 1.25%, but three backed a bigger increase to 1.5%. Minutes from the Bank’s meeting also reveal that it expects the UK economy will shrink by 0.3% in the April-to-June period.
The Bank did not update its outlook for the July-to-September quarter, but it has been said previously that expects the economy to grow during this period. If it does, then the UK would avoid a recession this year – with a recession defined as the economy shrinking for two consecutive quarters.
However, the Bank has also said previously that it expects the economy to shrink in the final three months of this year, during which the price cap on household energy bills is expected to be increased from £1,971 per year to about £2,800. The rise in domestic gas and electricity bills will lift the increase in the cost of living to “slightly above” 11% in October, the Bank said. It means the rate of inflation will be more than five times the Bank’s inflation target of 2%.
