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Bank of England raises interest rates to 1.25%, warns inflation will hit 11%

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The Bank of England (BoE) hiked interest rates for the fifth month in a row to 1.25 per cent on Thursday – but stopped short of an even bigger rise over fears the economy is plunging into the red.

The Monetary Policy Committee (MPC) pushed up the base rate by 0.25 percentage points to another 13-year high as it scrambles to rein in rampant inflation, which it now expects to top 11 per cent in October.

But mortgage-payers were spared an even bigger increase – which many analysts had anticipated could be 0.5 percentage points – after grim figures this week showed the UK economy is already going into reverse.

The Bank believes GDP will fall by 0.3 per cent in this quarter, compared to the 0.1 per cent growth it had pencilled in before, putting the country on the brink of a full-blown recession.

The MPC voted by six to three for the lower rise, indicating it was a tight choice.

The decision at noon came after the US Federal Reserve imposed a 0.75 percentage point increase – the biggest in decades – as it wrestles with the same problems.

It is the first time the Bank rate has been higher than 1 per cent since January 2009.

Meanwhile, former governor Lord King has urged Boris Johnson to level with the public about the ‘inevitable’ hit to living standards.

He said the crisis will be ‘reminiscent of the 1970s’ and suggested the PM has to be honest about what is happening.

“Our leaders need to give us a clear narrative explaining why recent events will inevitably lower our national standard of living, how that burden will be shared, why it is important to bring inflation down, and why measures to raise economic growth and reduce regional disparities will take many years to come to fruition but will work only if we make a start now,” he wrote in The Spectator.

The nine-person MPC includes governor Andrew Bailey, two deputy governors – Sir Jon Cunliffe and Ben Broadbent – and chief economist Huw Pill.

With headline CPI inflation forecast to reach double-digits by the end of the year, the MPC has voted for a rise in each of the last four meetings, in December, February, March and May.

However, it has been criticised for not responding quickly enough to rising prices and the overheating labour market.

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Last time three out of nine members of the Monetary Policy Committee already voted for rates to be set at 1.25 per cent.

However, some things have changed since then. The UK economy looks set to struggle, with an OECD forecast predicting it will be the weakest in the Group of Seven (G7) next year.

The Bank has been given a little more wriggle room by the Chancellor, who is set to funnel billions to struggling households to help them deal with soaring energy bills.

An interest rate raise will eat away at some of this handout because the cost of borrowing will go up for homeowners.

But savers will benefit from a hike.

“April’s GDP data … surely will mean that the internal block – Bailey, Broadbent and Pill – sticks to voting to raise Bank Rate by 0.25 per cent this month,’ said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“And given that some members thought last month that the guidance regarding further rises in interest rates was obsolete, we expect to see at least one of them, most likely Cunliffe, to vote for no change.

“With markets currently pricing in a 34bp increase in Bank Rate this week and a further 41bp rise for the August meeting, we expect both rate expectations and sterling to drop in the wake of this week’s meeting.”

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England faces a stern test of its mettle at the next interest rate decision, and any hesitation is likely to result in the pound being punished on the currency markets.”

Such a drop would mean that the price of petrol and diesel, and other imports that the UK pays for in dollars, would rise.

This month, the average price of filing a family car topped £100 for the first time.

“By raising interest rates, the Bank is putting the brakes on an economy that is already slowing of its own accord,” Mr Khalaf said.

“That risks the economy stalling, or worse, going into reverse.”

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