The rate hike was a widely expected move as the cost of living continues to rise
With inflation at 7 percent, the BoE’s Monetary Policy Committee (MPC) was under pressure to hike rates to slow the UK economy.
The Bank of England has hiked interest rates to 1 per cent in a widely anticipated move to stem the UK’s rapidly rising inflation rate.
The Bank has been set a target rate of 2 percent, if it falls short by 1 percentage point or more the Bank must write to the Chancellor of the Exchequer to explain why.
Since December 2021, the British central bank has raised interest rates four times from 0.1 percent to 1 percent.
Raising borrowing rates is one of the MPC’s main mechanisms for controlling inflation, with the theory being that the higher the base rate, the more expensive it is to borrow. Preventing borrowing eases the pressure on inflation and helps slow wage increases and the costs associated with running a business.
But with the UK economy having endured a pandemic and now facing a cost-of-living crisis, some experts have warned that raising the cost of borrowing could push the economy into recession, even though inflation is now at 7 per cent, the highest rate in decades.
Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “The economy is flipping on its own axis and a return to a higher interest rate environment means relearning old, forgotten rules for savers, borrowers and investors.
“The last time interest rates were at 1 percent, the economy was reacting to the financial crisis. Then prices went down. Now we’re in a cost of living crisis and they’re heading up.
“What will make navigating a rising interest rate environment even more difficult is that inflation remains elevated for now. It remains to be seen whether higher interest rates will have the desired effect of lowering inflation.
“By then, some people who are already struggling will feel that higher lending rates and rising cost of living is a double whammy they just can’t deal with.”
Other experts are calling for more support for consumers struggling with rising costs.
Joanna Elson CBE, Chief Executive of the Money Advice Trust, added: “Today’s rate hike, while small in scale, is a potential source of concern for people with significant amounts of credit when viewed in the context of rising costs across the board.
“While the lingering effects of higher inflation are likely to be felt much more severely, we know that any small increase in costs can cause problems for households with tight budgets.
“It is important that any increases in the cost of borrowing are not passed on to the many households who are already struggling to meet essential costs.
“With no abatement in soaring energy, fuel and food prices, more support is now needed for the many households already on the sharp end of the cost-of-living crisis. A significant increase in benefits would go a long way in helping people whose incomes are not keeping up with rising costs, as well as targeted support for those who cannot afford their bills.”
The move came hours after the Federal Reserve announced the biggest hike in US interest rates in over 20 years.
The Federal Reserve’s benchmark interest rate was raised by 0.5 percentage points to reach a target range of between 0.75 percent and 1 percent.
The hike was the highest since 2000; in March, the US Federal Reserve increased interest rates by 0.25 percentage points.