Bank of England raises interest rates to 0.5% and stops money-printing programme

The Bank of England has raised the key UK interest rate again – by a quarter of a percentage point to 0.5%. It's also going to cut back on its quantitative easing programme. John Stepek explains what it means for you.

Today, the Bank of England raised the key UK interest rate by a quarter of a percentage point to 0.5%. That’s exactly what it was expected to do. It did so by five votes to four – in other words, five members of the nine-member rate-setting Monetary Policy Committee voted in line with market expectations.

However, what has rather taken markets aback is the fact that the other four – as you might assume – did not vote to keep rates at 0.25%. No, they voted to raise rates by a full half a percentage point, to 0.75%.

For perspective, obviously, this is still very near an all-time low. But from a different perspective, the UK bank rate is now five times higher than it was a scant two months ago (rates went up from 0.1% to 0.25% on 16 December last year).

Quantitative easing programme to be unwound

Moreover, the Bank is going to unwind quantitative easing (QE). QE involves printing money to buy assets. Those assets – mostly government bonds – sit on the Bank’s balance sheet. One key point about bonds is that they eventually mature; thus far, the Bank has been maintaining QE by reinvesting the proceeds of maturing bonds as they do so.

The Bank is now going to stop doing that. So, in effect, when government bonds held by the Bank of England reach their payback date, the government will need to find a new borrower to lend them the money to repay that loan (whereas previously it would just have “rolled over”). That’ll amount to just over £70bn bonds during 2022 and 2023, and another £130bn over 2024 and 2025.

On top of that, the Bank is also going to sell off the corporate bonds that it has purchased.

Most importantly, the Bank’s attitude has changed drastically. In November, markets were also shocked, but back then, it was because Andrew Bailey, head of the Bank, had led them to believe that a rate rise was a dead cert, then switched tack at the last minute.

Now, inflation is public enemy number one again. It’s expected to peak at 7.25% in April – remember, this is the CPI measure, so RPI could easily be just under double-digits by that point (here’s what the difference between CPI and RPI inflation is, and why it matters).

That’s even while the Bank is warning consumers that there are tough times ahead. It reckons that the squeeze on spending created mostly by higher energy prices (though it nods to the increase in National Insurance scheduled for April too), along with excess supply building up as supply chain bottlenecks ease off, is going to drive the unemployment rate up to 5% by the middle of next year.

Meanwhile, energy prices might stop contributing to higher inflation rates but only because they “are assumed to remain constant after six months”. How realistic that assumption is is hard to judge, but even if energy prices remain where they are, that is quite the squeeze on consumer spending.

Get ready for stagflation

None of these things is inflationary in the sense of making the economy overheat. They are stagflationary, in the sense that prices rise but the price rises themselves choke off growth. If your energy bill goes up by 50%, that’s money you can’t spend on anything else; it does not boost demand in the economy.

The Bank even acknowledges this. “The sharp rises in prices of global energy and tradable goods of which the UK is a net importer will necessarily weigh on UK real aggregate income and spending. This is something monetary policy is unable to prevent.”

So why is the Bank raising rates then? “The role of monetary policy is to ensure that, as such a real economic adjustment occurs, it does so consistent with achieving the 2% inflation target sustainably in the medium term, while minimising undesirable volatility in output.”

I have to admit that this mostly sounds to me like pure self-justifying gobbledegook. The Bank will be told off for not meeting the 2% inflation target. By raising rates a bit, it can at least say “but we’re trying”.

Anyway – if you have a variable-rate mortgage, you’ll notice the difference quite quickly, so maybe consider switching. If you have savings, you’ll notice the difference rather more slowly I suspect, so it might be worth starting to shop around there too – though I wouldn’t lock in any rates yet, given that more rises are apparently set to come.

Recommended

Despite the crypto crash, bitcoin still has a bright future
Bitcoin & crypto

Despite the crypto crash, bitcoin still has a bright future

Cryptocurrencies have crashed hard, with bitcoin down by more than 50% from its peak. But, says Dominic Frisby, bitcoin still has a future – it is the…
19 May 2022
Do Kwon: the King of Crypto Lunatics
People

Do Kwon: the King of Crypto Lunatics

Cryptocurrency entrepreneur Do Kwon liked to ruffle feathers and stir things up in his industry. But the collapse of his empire has left investors des…
19 May 2022
Tech stock crash – dotcom bust 2.0 is upon us
Tech stocks

Tech stock crash – dotcom bust 2.0 is upon us

It’s carnage in the tech sector as the market crashes. But that spells opportunity for canny investors, says Matthew Lynn
19 May 2022
Three things you should learn from Bill Ackman's brilliant Netflix trade
Investment strategy

Three things you should learn from Bill Ackman's brilliant Netflix trade

Hedge fund guru Bill Ackman has lost $400m selling Netflix shares. John Stepek explains why this was a brilliant trade, and outlines three things that…
19 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Is the oil market heading for a supply glut?
Oil

Is the oil market heading for a supply glut?

Many people assume that the high oil price is here to stay – and could well go higher. But we’ve been here before, says Max King. History suggests tha…
16 May 2022
Value is starting to emerge in the markets
Investment strategy

Value is starting to emerge in the markets

If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy tra…
16 May 2022