The Bank of England Monetary Policy Committee, which sets monetary policy to meet the 2% inflation target, raised interest rates by 50 basis points to 1.75% as inflation is set to pass 13%. This is the biggest interest rate rise since 1995 and it is predicted that the UK economy will shrink in the last three months of the year and keep shrinking until the end of 2023.
This is the sixth successive time that the Monetary Policy Committee has increased interest rates, with the committee voting a majority of 8-1 in favour of increasing interest rates to 1.75%, with one member preferring to increase interest rates to 1.5% instead.
The Bank of England released its Quarterly Monetary Policy Report, which provides an update on the bank's outlook for the UK economy. They expect the economy to shrink in the final quarter of 2022, and for this to continue to contract until the end of 2023.
Suren Thiru, Economies Director of ICAEW, said: "Raising interest rates is more likely to nudge the UK into recession than curb the current spike in inflation. The Bank of England is facing a near impossible trade-off between soaring inflation and an economy teetering on the bring of recession. However, raising interest rates will have little effect on the global headwinds and supply constraints driving inflation, and so risks inducing a downturn by squashing consumer demand"
Russia's invasion of Ukraine has resulted in soaring energy bills across the country as the country cuts gas supplies to Europe, and typical households can expect to pay almost £300 a month for their energy by October. Whilst increasing interest rates to discourage people to borrow and spend more, it comes as many households find themselves squeezed during the current cost of living crisis.
Homeowners on typical tracker mortgage will have to pay over an additional £50 a month or £167 more a month than in December 2021. Higher interest rates also mean higher charges on credit cards and bank loans, which many people took out as inflation has driven up prices.