Why the Bank of England raised interest rates and how it is fighting inflation


Andrew Holder, the Bank of England’s Fareham-based agent for Central Southern England, explains what the bank is doing to bring down inflation

THEY probably don’t need the Bank of England to tell you that prices have risen sharply.

The annual inflation rate — how much the prices of things people buy have risen in the past year — was 7 percent in March.

That’s well above the government’s two percent inflation target for the Bank of England.

Here’s why inflation is so high and how we’re going to bring it back to target.

People have been buying more goods as Covid restrictions have been eased in the UK and most other countries. This higher demand has pushed up prices.

At the same time, there were supply problems as many companies struggled to get enough goods to sell.

For example, recent lockdowns have reduced production in China – a key source of the world’s supply of raw materials and manufactured goods.

And many of the contacts I speak to at businesses here in Dorset and Hampshire report that their shipping costs have become very high in recent years as the pandemic has disrupted the normal flow of cargo ships around the world.

These and other supply problems have all resulted in a rise in the price of goods, particularly goods entering the UK from abroad.

Even more striking, large increases in oil and gas prices have pushed up the cost of transportation, heating homes and offices, and running factories.

The impact of the Russian invasion of Ukraine on oil and gas prices means there could be another hike in the energy price cap in October.

Putting all of these things together, we expect inflation to keep rising — to about 10 percent later this year.

With prices rising much faster than wages, the cost of living is a very big problem for a great many people.

We know that high inflation hits poorer households the hardest.

The Bank is taking action to ensure inflation returns to target. This will ease the cost of living pressures on households and help businesses invest and create jobs.

There is nothing we can do about the supply problems or the higher energy prices that are currently driving up inflation.

But we have ways to bring inflation down over the next few years — mainly through the use of interest rates.

Higher interest rates make it more expensive for people to borrow to spend and encourage saving, so they tend to spend less. And when people spend less, prices tend to rise more slowly.

The bank’s Monetary Policy Committee (MPC) cut the base rate – the rate that drives many other interest rates in the UK – from 0.1 per cent to 0.25 per cent in December, to 0.5 per cent in February and then to 0. Raised 75 percent in March.

In early May, the MPC raised interest rates to 1 percent, and they said they may have to raise it more in the coming months.

Higher interest rates will reduce inflationary pressures in the economy over time.

And it is unlikely that oil, gas and imported goods prices will continue to rise at the current pace.

We also believe that the demand for goods will not increase as quickly anymore, in part because the higher cost of living will reduce people’s spending.

Some of the supply issues faced by businesses are also likely to resolve.

All in all, we expect inflation to start falling next year and return to the 2% target in about two years.

Using our contacts in Dorset and Hampshire and across the UK, I and the rest of the Bank’s representatives will ensure that the MPC has all the information it needs to make the right decisions and bring inflation down.


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