The Bank of England is set to impose another interest rate hike on the UK economy today, the 12th consecutive increase in its battle to curb rampant inflation.
Both financial markets and economists widely expect a 0.25 percentage point rise to 4.5%.
The Bank Rate had stood at 0.1% in December 2021 before the tightening cycle began to tackle the pace of price rises, which were initially caused by economies getting back in gear after the COVID pandemic.
Russia’s invasion of Ukraine the following February then exacerbated the inflation problem, with soaring energy costs piling additional misery on western nations.
Those considerable extra costs, not only faced by households, are still filtering through in the form of stubborn inflation for many goods and services despite wholesale energy costs easing in recent months.
The latest official figures showed the headline consumer prices index (CPI) measure at 10.1% – fed by the highest grocery inflation for 45 years.
The bank will have also been concerned that higher-than-expected wage increases will embed inflation in the economy over the months ahead.
But there is good news on the CPI number just around the corner.
The inflation data for April is set to strip out the effects of the leap in household energy bills seen in April 2022 while fuel, which was also on the march at that time, is now well down on the levels seen in the same month a year ago.
Some economists predict a CPI number for April below 8% just because of the energy impact alone.
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This does not mean that prices are necessarily coming down and the cost of living crisis is over.
It is just that the contributions to inflation from the energy components are not so severe when it comes to measuring the pace of price increases over a 12-montn period.
Raising Bank Rate is a tool to reduce demand in the economy – to cool activity and help inflation ease back towards the Bank’s 2% target.
But there are consequences.
Chief among them is the impact on borrowers, especially households on variable mortgage deals or those who have had to secure a new fixed deal over the past year.
According to research by TotallyMoney and Moneycomms, a further quarter point interest rate rise will add £26 to monthly repayments for variable customers on the average UK property costing £270,708 with a 75% loan to value ratio.
The Bank rate increases, they said, meant the same customers were now facing forking out an extra £482 per month compared to pre-December 2021.
The Bank is mindful of the impact its actions are imposing on millions of households that are already struggling under the weight of meaty bills.
With that in mind, the remarks contained in the minutes of the Bank’s meeting and wider monetary policy report, all released at midday, will be crucial to understanding the likely way forward for borrowing costs.
The Bank is formally expected to raise its forecasts for economic growth as its staff no longer expect a recession this year but the outlook for Bank rate is a bit more clouded as inflation has proved more stubborn to bring down.
Bank governor Andrew Bailey’s comments to reporters will be especially closely watched for signs the rate-setting committee is edging towards a pause in its rate hikes.
The prospect of an end to the tightening will largely depend on the data ahead.
Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “Consumers and businesses will be praying that this is the last rate hike…. they will have their fingers crossed that inflation numbers will fall sharply before the next MPC (monetary policy committee) rate decision on 22nd June.
“Savers may be enjoying the best returns on cash savings for more than a decade but those with borrowing have been pushed to the brink by the financial impact of a dozen consecutive rate hikes.”