Interest rates: 'Lost the plot!' BoE told it has made 'an enormous error' with hike
THE BANK OF ENGLAND has voted to raise interest rates up to 0.25% after inflation soared to its highest level in ten years.
The Bank Of England voted to raise interest rates today to 0.25 percent from the record low it had been held at for months, 0.10 percent. The news comes after inflation rocketed to 5.2 percent yesterday, smashing City forecasts of a rise to 4.8 percent and taking the consumer prices annual rate to its highest level since September 2011. The decision about whether they would increase rates was thrown into doubt after the emergence of the Omicron variant which is crippling consumer confidence. The nation recorded 78,610 new cases on Wednesday - the highest daily number since the start of the pandemic. However, former BoE policymaker Professor Danny Blanchflower has accused the committee of making an "enormous error" in raising interest rates and even accused them of costing Boris Johnson the by-election.
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Rachel Reeves slams Sunak for California holiday
Rachel Reeves, Labour’s Shadow Chancellor of the Exchequer, has slammed Rishi Sunak's California holiday at the time of the BoE announcement.
She has also expressed her concern for families who will face higher mortgage payments after the decision was made today to raise interest rates.
She said: “Prices have been soaring and many are feeling the pinch, so families will be concerned about additional pressures on their finances from higher mortgage payments and other debt.
“The Chancellor should get on a plane back from California and get to work on a plan for growth, and crucially a plan to tackle the cost of living crisis.
“That must start immediately by scrapping VAT on household gas and electricity bills to ease some of the burden this winter.”
The Chancellor must come forward now with a plan for growth, and crucially a plan to tackle the cost of living crisis.
\u2014 Rachel Reeves (@RachelReevesMP) December 16, 2021
That must start immediately by scrapping VAT on household gas and electricity bills to ease some of the burden this winter. 2/2
First-time buyers stretched on all fronts, says expert
Karthik Srivats, co-founder of mortgage lender Ahauz, which provides equity loans to first-time buyers, said: “After years of rock bottom rates, the tide has now turned and no group is going to suffer a greater squeeze on affordability than first-time buyers.
“Today’s announcement from the Bank of England comes at a time when young people already face a perfect storm of record house prices, soaring energy bills, and increased taxes.
“While some predict that higher interest rates could trigger a slide in house prices, that may well turn out to be wishful thinking.
“Equally likely is that we see property prices climb further as demand continues to outstrip supply.
"That means first-time buyers will end up stretched on all fronts.
“With speculation already rife that today’s hike may be the first of many, the current level of enquiries from borrowers looking for a long-term fixed deal could soon turn into a flood.
"We are already seeing demand for equity loans increase as borrowers look for new ways to increase their affordability and drive down overall borrowing costs."
Bank of England decision relatively good news for savers, says expert
The Bank of England decision is relatively good news for savers, according to the CEO and Co-Founder of Raisin UK.
Commenting on the latest announcement, Kevin Mountford said: "There will be an impact on borrowers and savers, albeit the majority of mortgage customers are on fixed products so won't feel too much pain until they come to renew.
"For savers, this should finally offer some respite from the two rate reductions we saw back in March 2020.
"However, due to the competitive nature of the UK market rates are generally artificially inflated and in many respects, there are relatively good rates available.
"This said, the largest amount of savings still sits with the big banks who pay dire rates to their customers so let's hope that they at least pass on the full 15bps rate increase for those customers."
Bank of England has made an 'enormous error'
The Bank of England has made an "enormous error" by raising interest rates today, according to former BoE policymaker, Professor Danny Blanchflower.
He continued: "Bank of England likely will result in Boris losing a by-election today as mortgage rates rise...MPC lost the plot."
Mr Blanchflower served on the MPC from 2006 to 2009.
MPC makes an enormous error raising rates as output slows and the virus spreads. Foot traffic on London Underground down 20% vs last week as output slows. Only issue is when they will reverse. Oh dear
\u2014 Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) December 16, 2021
Bank shares rise after Bank of England announcement
Bank shares are rising after the surprise Bank of England announcement to raise interest rates today.
Barclays is up over 4%, Lloyd's up over 6%, NatWest, StanChart, HSBC also rallying after @bankofengland's surprise rate hike
\u2014 Victoria Scholar (@VictoriaS_ii) December 16, 2021
BoE believes the job market is 'tight'
The Bank of England has judged that the job market has ridden out the end of the furlough scheme.
On Tuesday, the jobless rate dropped again, to 4.2 percent.
The BoE minutes explained this decision: "At its November meeting, the Committee judged that, provided the incoming data, particularly on the labour market, were broadly in line with the central projections in the November Monetary Policy Report, it would be necessary overcoming months to increase Bank Rate in order to return CPI inflation sustainably to the 2 percent target.
"Recent economic developments suggest that these conditions have 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."
BoE predicts inflation to hit 6% by April
The Bank of England has predicted that the CPI inflation rate will hit six percent next April, when the cap on energy bills is lifted.
Six percent is three times its two percent target.
The minutes from the meeting detail their decision: "Twelve-month CPI inflation rose from 3.1 percent in September to 5.1 percent in November, triggering the exchange of open letters between the Governor and the Chancellor of the Exchequer that is being published alongside this monetary policy announcement.
"Relative to the November Report projection, there has been significant upside news in core goods and, to a lesser extent, services price inflation.
"Bank staff expect inflation to remain around 5 percent through the majority of the winter period, and to peak at around 6 percent in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices."
'Surprising' decision is only the second December rate hike in half a century
Markets columnist Jamie McGeever has said today's Bank of England decision was "something of a surprise" and only the second December rate hike in almost half a century.
He said: "Bank of England raises interest rates, by 15 bps to 0.25 percent. This is only the second December rate hike in almost half a century.
"Something of a surprise from the Bank of England, even though current inflation is above 5 percent. The first-rate hike in 3 years comes as the Omicron spread is accelerating sharply, covid cases in the UK are at record levels, social distancing measures likely to hit growth."
Something of a surprise from the Bank of England, even though current inflation is above 5%. The first rate hike in 3 years comes as as the Omicron spread is accelerating sharply, covid cases in the UK are at record levels, social distancing measures likely to hit growth.
\u2014 Jamie McGeever (@ReutersJamie) December 16, 2021
What the BoE decision means for your pensions and savings
The Bank of England has made the decision to raise interest rates to 0.25 percent from the record low of 0.10 percent.
The landmark decision comes a day after the rate of UK inflation reached 5.2 percent - the highest rate in a decade.
Inflation creates specific problems for pensioners which could be remedied by today's vote.
Mortgage rates remain competitive, say Knight Frank
In light of the Bank of England's decision to raise interest rates, Simon Gammon, managing partner, Knight Frank Finance, said: “By raising the base rate it’s clear that the Bank of England believes the economy will shrug off most of the effects of Omicron.
"Getting a grip on rising inflation appears to be the number one priority.
"Mortgage rates on the high street have been edging upwards during recent weeks in anticipation of this moment and it’s clear the lenders believe there could be at least one more hike in the base rate next year.
“Though mortgage rates have been rising, they remain very competitive by historic standards.
"Our advice to borrowers is to get an offer locked in now.
"Offers are typically valid for six months and can easily be amended should it be possible to lock in a more favourable deal at a later date.”
'This is a big moment,' says data editor
Sky's Data Editor Ed Conway has described the Bank of England's decision to increase interest rates as a "big moment".
He told Sky News that he had not been convinced they would opt to increase the rate due to the Omicron variant of concern, "but they have gone for it".
"This is a big moment that could be the start of a series of increasing interest rates, pushing up the cost of borrowing for families across the country, also increasing the benefits of saving in the face of inflation," he added.
The Bank of England raises interest rates for first time since Brexit
The Bank of England has raised interest rates despite the threat of the Omicron variant.
The decision had been thrown into doubt after the Omicron variant began to rapidly spread through the population, damaging consumer confidence.
The vote was cast with eight votes in favour of raising rates and one vote against.
This is the first time that England's Monetary Policy Committee has decided to raise rates since Brexit.
More than 10% of firms have no cash reserves
The Office of National Statistics has reported that 13 percent of firms say they have no cash reserves to tide them through a downturn.
This is the highest percentage reported since June 2020.
13% of businesses reported they had no cash reserves in early December 2021.
\u2014 Office for National Statistics (ONS) (@ONS) December 16, 2021
This is the highest percentage reported since June 2020 (6%) when the question was first asked https://t.co/h2XCEAQbKU
Seven percent of businesses do not think they will survive
The Office of National Statistics has reported that seven percent of businesses say they have "little or no confidence" that they would survive the next three months.
This figure has almost doubled from the four percent who said the same thing in early October.
7% of businesses reported no or low confidence that they would survive the next 3 months in early December 2021.
\u2014 Office for National Statistics (ONS) (@ONS) December 16, 2021
The transportation and storage industry reported the highest percentage at 14% https://t.co/c5KZUxqWLi
Retail footfall drops by one percent
Retail footfall in the UK has fallen by one percent in the week to 11 December 2021.
This means the number of people in shops was only 82 percent of the level seen in the equivalent week of 2019, the ONS says.
Retail footfall in the UK fell slightly by 1 percentage point in the week to 11 December 2021 according to @Springboard_.\u202f
\u2014 Office for National Statistics (ONS) (@ONS) December 16, 2021
This is 82% of the level seen in the equivalent week of 2019 https://t.co/v3qiMv473Y pic.twitter.com/QS5DCOdGXy
UK business growth slumps to 10 month low
Business growth in the UK has slumped to a ten-month low as the Omicron variant hammers hospitality and travel sectors.
Business and consumer confidence tumbled in tandem amid a wave of cancelled bookings.
New business growth in the services sector was the weakest since lockdown measures were eased in March.
December flash data for the UK pointed to a slowdown in growth with the #PMI at a 10-month low of 53.2 (Nov: 57.6). A surge in Omicron cases hit spending on consumer services while output growth in the manufacturing sector picked up. Read more: https://t.co/2RIN24FMgS pic.twitter.com/aPmNSpcQgl
\u2014 IHS Markit PMI\u2122 (@IHSMarkitPMI) December 16, 2021
IMF urges Bank of England to raise interest rates
The International Monetary Fund has urged the Bank of England to raise rates to combat inflation.
The advice comes after inflation soared to a ten-year-high in the UK, hitting 5.2 percent.
UK inflation has soared to its highest level in a decade, hitting 5.1% in November, far outstripping expectations.
\u2014 Ajay Bagga (@Ajay_Bagga) December 16, 2021
Todays Bank Of England meeting will be keenly watched. IMF has urged BOE to raise rates to combat inflation. Omicron surge may not allow BOE to act today. pic.twitter.com/gr5PJd53Ju
Interest rates more likely to rise in February, claims expert
The outcome of today's Bank of England vote on interest rates will be a close call but if interest rates do not rise today then they may in February, according to Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes.
She explained: “The Bank could well use few more weeks to get more clarity about Omicron’s implications for the outlook and to see whether the recently adopted government’s measures are sufficient to contain its fast rise in the country.
"In the meantime, additional data on the impact from the expiry of the furlough scheme on the labour market will also become available.
"Overall, it makes sense for the Bank of England to keep rates on hold at its upcoming meeting, avoiding rattling markets just before the liquidity-light holiday period.
"The February meeting – including a full reassessment of the outlook and a press conference to explain the rational underpinning a policy change – seems to offer the MPC a more appropriate set-up for rates lift-off.”
Inflation is bad news for savers
Rising inflation at a time when interest rates are at record lows is bad news for people trying to save.
Money in the bank will not have the same value as this time last year.
If high levels of inflation stay for longer than anticipated, the Bank may raise interest rates, which would be good news for those trying to save.
However, it has so far resisted doing this and the emergence of the unpredictable Omicron variant reduces the likelihood of a hike.
What is inflation?
Inflation is the measure of how much prices are rising or falling and is tracked in several ways.
The main measure used by economists is the consumer prices index (CPI).
The CPI records the cost of a basket of 700 items including food, transport and entertainment.
The rate refers to how much those prices have gone up over a year.
The Bank of England is tasked with keeping annual inflation at two percent but it has been above that for several months and now stands at a ten-year-high of 5.2 percent.
Britons brace for a 'nationwide living standards freeze'
Jack Leslie, a senior economist at the Resolution Foundation thinktank, referring to the combined impact of the Omicron variant and inflation, said: “Next year is likely to be marked by acute economic pain for some parts of the economy alongside a nationwide living standards squeeze.”