Bank opts for longest rate raise run since independence in face of double-digit inflation, but £1,200 income hit per household means rates may not rise as much as markets expect

The Bank of England’s Monetary Policy Committee has opted to raise interest rates at its fourth successive meeting – the first time it has done this since becoming independent 25 years ago – and marked up the scale of Britain’s cost of living crisis by forecasting double-digit inflation and a £1,200 income squeeze, the Resolution Foundation said today (Thursday) in response to the Bank’s latest Monetary Policy Report (MPR).

The Foundation notes that the decision to raise to interest rates to 1 per cent is significant as it is the fourth successive rate rise, and bring rates back to levels not seen since the financial crisis.

The immediate direct impact of today’s rate rise is likely to muted – saving rates remain historically low, while less than one-in-ten households are on variable rate mortgages (due to falling home ownership, and increased take-up of fixed-rate mortgages) and will therefore see their monthly payments increase straight away.

In contrast, all households will be affected by the Bank’s updated economic outlook, which includes double-digit inflation later this year, peaking at 10.25 per cent – the first time the UK will have experienced such high inflation in 40 years.

This higher inflation outlook, coupled with weaker GDP growth, mean that the Bank is now forecasting Real Household Labour Income (RHLI) to fall by 3.25 per cent this year. This is equivalent to an income fall of around £1,200 for the average household, says the Foundation.

The scale of that income fall, and the slowing of the economy that will follow, mean the Bank does not think the scale of interest rate rises currently expected by markets will be required to bring inflation back to target, says the Foundation.

James Smith, Research Director at the Resolution Foundation, said:

“The decision to raise interest rates today is important in the Bank’s fight to stop high inflation becoming entrenched. It will have relatively little immediate impact on households in the short term, although in time the intention is for unemployment to rise.

“Of more interest will be the pace and scale of future interest rate rises as the Bank of England – along with other central Banks – seek to tame inflation without inducing a recession. Here the Bank of England is clearly signalling that markets should calm down in terms of how rates might go – arguing that current market expectations would see unemployment rising for the next three years, and inflation undershooting their 2 per cent target.

“But if few households will feel a small interest rate rise immediately, everyone will be affected by the return of double-digit inflation as the Bank are now forecasting. This will further tighten Britain’s cost of living crisis, with families facing an average income loss of around £1,200 this year.

“This awful outlook for living standards may make monetary policy decisions harder, but it makes fiscal policy decisions far easier. The Government can’t shield us all from the pain of rising energy costs, but can and must provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis.”