The Bank of England is “walking a tightrope” and may tip Britain into recession thanks to its interest rate rises, an investment expert has said.
Threadneedle Street today (August 3) decided to increase its base rate from 5 percent to 5.25 per cent, marking its 14th rate increase in a row. The Bank also said it expects the Government to meet its promise to halve inflation by the end of the year.
Bank Governor Andrew Bailey said: “Inflation is falling and that’s good news. We know inflation hits the least well off the hardest and we need to make absolutely sure it falls all the way back to the 2 per cent target. That’s why we’ve raised rates to 5.25 per cent today.”
The move came as little surprise to most analysts who had been expecting such an increase.
Marcus Brookes, chief investment officer at Quilter Investors, warned that even with inflation coming down faster than forecast, this may not be the end of the BoE’s rate hikes.
He added: “The BoE is walking a tightrope at this stage, where the interest rate rises we have seen could tip the UK economy into recession. The BoE will want to avoid that, but may have no choice in order to tame inflation.
“The US is looking increasingly likely that it could achieve a soft landing by keeping economic growth ticking along as inflation comes down.
“The UK has no such luxury, and as such should a recession become more likely then we will see how long the line that rates will stay this high for an extended period of time can hold.”
Mr Brookes added interest rates probably don’t have to go as high as market predictions, which are currently somewhere above 6 per cent.
He said: “The UK economy and consumer has been incredibly resilient but are clearly now beginning to be hit.”
In an unusual three-way disagreement, two members of the Bank’s rate-setting Monetary Policy Committee (MPC) voted to hike base rate further, while one wanted to keep it unchanged.
The majority said some of the risks of more persistent domestic inflation had “crystallised”, a word which the bank used repeatedly through its rates report on Thursday.
It said increases in private-sector workers’ wages and other factors which could make inflation more persistent had “begun to crystallise”.
The economy had shown “surprising resilience” over several quarters with the Bank forecasting that the UK looked set to avoid a recession.
Samuel Mather-Holgate, of Swindon-based advisory firm Mather & Murray Financial, said: “Increasing rates, knowing the last rises haven’t been felt yet, and whilst inflation is falling, is absolute lunacy.
“Only one member of the Monetary Policy Committee wanted to maintain its previous level and they should be applauded.
“This further rise will add misery to homeowners and those with business finance. An already lifeless housing market will shrink further into itself, not to reappear until Spring.
“The Governor needs to get a grip and reverse these hikes before the end of the year. Thankfully, the next inflation print might just give him the impetus to pause and reflect on his insane mission to bash borrowers.”
Hamish Anderson, CEO at the Cambridge-based global payments and forex provider, Money Mover, told Express.co.uk: “My heart sank for the small businesses of the UK when I heard the latest announcement from the Monetary Policy Committee.
“To continue to increase base rates robotically seems like a futile act bordering on self-harm.
“The traditional economic rules are clear. You counter inflation by raising interest rates. This raises the cost of money, reduces consumer spending power and encourages suppliers to lower the cost of their products.
“However, it is a blunt instrument and the Bank is overlooking unique factors that mean the traditional rules do not apply.
“The drivers of inflation, such as the war in Ukraine, the impact of Brexit and Covid, are beyond the reach of the tools it has at its disposal. Raising interest rates in the UK will not cut the cost of fossil fuels or reduce the cost of trading with Europe.”
Mark Grant of Gloucester-based business finance broker, The Business Finance Branch, said the latest rate hike is another serious body blow to UK businesses.
He said: “It will get passed on in full and immediately to commercial borrowers. Non-bank lenders will see their own funding costs increase, so the end business borrower will see their cost of borrowing increase, too.
“We see many clients using business finance to afford the upfront costs of taking on new work and opportunities. This rate increase will stifle productivity, growth and business confidence, in turn affecting GDP in the wider economy.”
John Lamerton, bestselling business author and lifestyle business owner at Big Idea Ventures, told Express.co.uk the Bank seems determined to push Britain into recession.
He said: “Small business owners have already had to survive Covid lockdowns, inflation-busting outgoings in the form of suppliers and staff, and a cost-of-living crisis causing customers to drastically reduce spending.
“This latest rate rise could well be the final nail in the coffin for many small business owners.”