Bank of England raises interest rates to 0.25 per cent

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Bank of England raises interest rates to 0.25 per cent

The Bank of England has raised interest rates to 0.25 per cent in an effort to curb rising inflation.

At the central bank's monetary policy committee meeting yesterday, members voted 8-1 to raise rates by 0.15 percentage points from their historic low of 0.1 per cent.

The MPC also voted unanimously to maintain corporate and government bond purchases at current rates.

In the meeting notes, released today (December 16), the MPC said despite the omicron variant of Covid spreading rapidly, global risky asset prices have largely recovered from an initial drop while longer-term advanced-economy government bond yields have declined.

The committee acknowledged that inflation was rising more than expected and that downside risks from the omicron variant remained, but it said the balance of its effects on demand and supply, and therefore on medium-term global inflationary pressures, was unclear.

Since the November report Bank staff have revised down their expectations for the level of UK GDP in 2021 Q4 by around 0.5 per cent, leaving GDP around 1.5 per cent below its pre-Covid level. 

The MPC said the economic conditions needed to justify a raise in interest rates have now been met.

"The labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures. Although the Omicron variant is likely to weigh on near-term activity, its impact on medium-term inflationary pressures is unclear at this stage.

"The committee judges that an increase in bank rate of 0.15 percentage points is warranted at this meeting."

The central bank had previously been expected to raise rates after figures from the Office for National Statistics showed a rise in employment levels after the end of the furlough regime, however more recent inflation figures led to a drop in expectations.

Employment levels were expected to fall in October after the furlough scheme ended in September, however the number of payrolled employees is now higher than before the pandemic, in February 2020.

But rocketing inflation put pause to the expectations of a rate rise, after ONS figures released yesterday showed that inflation hit 5.1 per cent in the twelve months to November, up from 4.2 per cent in October.

This is more than double the BoE’s target of 2 per cent, which has been exceeded each month since May this year.