Back to back interest rate rises

With prices rising across the board, the Bank of England has stepped in to try and cool the market announcing an increase in interest rates. The rise, which is the second in three months and the first back to back increase in almost two decades, means interest rates will increase from their current 0.25% to 0.5%.

The move by the Monetary Policy Committee (MPC) came as the Chancellor was taking to the floor of the house of commons to announce a series of measures designed to offset in part, the hike in energy prices that Ofgem had announced just hours before.

Perfect storm for cost of living

The much anticipated announcement by Ofgem, means that the energy price cap – the maximum amount customers can be charged by energy companies on their standard (non fixed) tariff – has increased by 54%, adding almost £700 a year to people’s bills.

Combined with planned increases in National Insurance and rising costs elsewhere caused by supply shortages, higher wages and Brexit; the increase in energy costs creates a perfect storm for the cost of living and is likely to hit low and middle income families hardest.

Pressure on interest rates

There was always going to be pressure on the Bank of England to increase rates, which have remained at historically low levels since 2009, as they can help to temper volatile markets and offer some inflationary control. With inflation (CPI) expected to hover around 6% across 2022, peaking in April at more than 7%, there was even pressure from within the Banks own ranks for a bigger rise now. When the MPC met on 3rd February, Four out of Nine of its members voted to increase the main rate by 0.5% to 0.75%, in a bid to stave off more sustained inflation and price rises.

Whilst the decision was a smaller increase now, news of the pressure for an injection of pace to proceeding within the MPC, will give the markets a clear signal of the direction of travel. A return to the 5% interest rate levels seen before the financial crisis in 2009 is some way off and guidance from the MPC remains around smaller incremental steps, but the reality is this is likely to be the first in a series of those steps. Some have suggested we may see decisions on rate rises taken outside of the planned meetings of the MPC over the coming months, but at the very least, don’t be surprised if we see successive increases when the MPC does meet in 2022.