Bank of England increases rates for the second time in three months as the cost of living rises.
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The Bank of England has raised interest rates for the second time in three months to try to curb a rapid rise in the cost of living.
The increase to 0.5% from 0.25% came as the Bank said inflation was on course to hit a 30-year high.
Prices are expected to climb faster than pay, putting the biggest squeeze on household finances in decades.
It comes as the chancellor unveiled a support package to help households cope with a 54% jump in energy bills.
Prices on the rise
Bank policymakers warned that rising gas and electricity costs would keep pushing up prices across the economy.
Inflation, as measured by the consumer prices index (CPI) is expected to peak at 7.25% in April, and average close to 6% in 2022.
This is well above the Bank’s 2% target, and would be the fastest price growth since 1991.
Policymakers also said there were increasing signs of broader price pressures across the economy.
Prices of household appliances such as fridges had climbed almost 10% over the past year.
Goods shortages also meant retailers were offering fewer bargains in the January sales compared with previous years.
The Bank said food prices and rents were also likely to creep up in the short term.
Pay deals going up
Policymakers said there had been a “material pick-up in pay settlements” this year, with the average worker enjoying a 5% pay rise, according to a Bank survey.
However, pay increases are not expected to keep pace with inflation.
The Bank’s latest Monetary Policy Report predicted post-tax incomes would fall 2% this year, after taking into account the rising cost of living.
This represents the biggest fall in take-home pay since records began in 1990.
Nevertheless, “acute” staff shortages in sectors such as hospitality, engineering, construction and IT meant many employers were offering staff “ad-hoc” bonuses to keep them.
The pandemic meant other workers had retired early, stayed in education or cut down their hours for a better work life balance. The Bank said this had created other labour shortages that could take “many years to be resolved”.
Bank takes action
The rapid rise in prices led to some members of the Bank’s Monetary Policy Committee (MPC) to call for a bigger rate rise.
Four of the nine members voted to increase rates to 0.75% to ward off fears that price rises could become more sustained.
The MPC voted unanimously to end new purchases as part of its £895bn bond buying programme to support the economy.
Omicron hits growth
The rapid spread of the Omicron Covid variant is expected to hit growth this year.
The economy is forecast to stagnate in the first three months of this year, while the Bank also cut its annual growth forecast for 2022 from 5% to 3.75%.
Policymakers expect the economy to grow by around 1.25% in 2023.
While consumers are expected to dip into their savings to maintain living standards, this is expected to slow down later this year, weighing on growth.