The Speaker
Saturday, 18 May 2024 – 10:40

Interest Rates Increased to 0.75% by Bank of England

The Bank of England today announced that interest rates would be increased from 0.5% to 0.75%, bringing interest rates back to pre-pandemic levels.

Interest rates are usually lowered in an attempt to encourage people to borrow and spend more money, usually with the intention of encouraging growth.

The Bank of England’s Monetary Policy Committee voted to increase the inflation rate by a majority of 8 for to 1 against. The lone dissenter, Sir Jon Cunliffe, cited concerns regarding the possible impact on household incomes.

In February, the Bank of England increased the inflation rate to 0.5% by a majority of 5 to 4. The 4 members of the committee who voted against the increase had been in support of an increase to 0.75%, the figure at which interest rates now stand. At the time, the bank’s Governor Andrew Bailey stated:

“It would be a mistake to extrapolate simplistically from what we have done today and assume that rates are now on an inevitable long march upwards.”

Interest rates are usually increased in an attempt to reduce borrowing and encourage people to save money, but can slow economic growth.

The UK is currently going through what many have dubbed a “cost-of-living crisis”, with the price of various basic goods such as food and fuel greatly increasing in recent months.

Inflation is currently around 5.5%, and could be as high as 8% by April – greatly outpacing the median salary increase for the past year – meaning real wages are falling for most people.

The price of fuel was already increasing towards the end of 2021 – before Russia invaded Ukraine, leading to an array of sanctions, reducing oil supply and further driving up the price of oil and gas, with the price per barrel reaching $139 per barrel on Sunday. Russia and Ukraine are also major exporters of grains, causing food prices to surge as well.

The price increase of fuel had already led the government to increase the energy price cap, set to take effect in April, prior to the war, and many expect a similar announcement for another price cap increase come October in the wake of the conflict in Ukraine. In light of this, economists at Goldman Sachs have predicted inflation could rise as high as 9.5% in October.

Employment has, as the Prime Minister relentlessly reminds everyone of at every PMQs, undergone an impressive recovery to pre-pandemic levels. High employment strengthens the negotiating position of workers and unions with respect to their wages, but policymakers at the Bank of England raised concerns that this, paired with the high inflation rate, could cause a feedback loop of wage increases leading to companies increasing their prices to maintain profits, leading to additional inflation; a so-called “wage-price-spiral”. It appears that this fear is what drove the decision to increase the interest rates.

This apparent infraction against worker negotiating power has then, predictably, angered unions, with Unite’s General Secretary Sharon Graham saying:

“Millions of working people are facing the worst cost-of-living crisis for generations.”

“This rise will put even more pressure on household finances as inflation and energy bills continue to skyrocket.”

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