As widely awaited, the Bank of England has announced a rise in the base rate by 0.5 percentage points, bringing it to 2.25%. This monetary policy decision – a seventh consecutive rise – reflects the intense and persistent inflationary pressures in the United Kingdom today, despite a small improvement last month.
The Bank of England argued that “further forceful” monetary tightening was needed as they attempt to bring the CPI rate down to a healthier level. According to the Office of National Statistics, inflation fell from 10.1% to 9.9% in August for the first time in nearly a year as fuel prices dropped unexpectedly. But with food bills continuing to soar, economists warn of a short-lived respite to households.
Last week, a survey from the Bank of England found that one third of people in the UK were dissatisfied with how they are handling inflation – the lowest level of confidence on record. With the highest inflation rate in the G7, the central bank has been accused of being too dovish compared to the Federal Reserve.
Since the last Monetary Policy Committee meeting, Prime Minister Liz Truss revealed a major energy cap policy to support the cost-of-living crisis. The policy, which freezes the cap at £2,500 from 1 October 2022, will have a considerable impact on the rate of inflation. The CEBR expects CPI inflation to be approximately 11% in October in light of the policy move (compared to 14% peak previously forecasted), which should then moderate in January, shaving off around five percentage points to the anticipated CPI inflation rate for the beginning of 2023.
Even with an energy support package, inflation will still be at a record high, and the central bank will likely continue to increase the base rate into next year.
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