Last week the Monetary Policy Committee of the Bank of England announced its decision to increase interest rates from 4% to 4.25%, marking the eleventh hike in the past 18 months. The Monetary Policy Committee (MPC) of the Bank of England is responsible for establishing monetary policy to achieve the 2% inflation target while also supporting growth and employment.
The US central bank also raised interest rates by 0.25% on Wednesday, despite concerns over financial instability following several recent bank failures.
This move comes in response to a surprising surge in UK inflation last month, which reached 10.4% largely due to shortages of salad and vegetables. As a result, the Bank of England has raised interest rates to their highest level in 14 years to combat rising prices.
By increasing interest rates, people are encouraged to save money and are less likely to borrow, resulting in decreased spending and potentially slowing down the rate of price increases.
However, as the UK is impacted by global price increases, the effectiveness of rate hikes is limited.
The high cost of energy, driven by increased demand for oil and gas as life returns to pre-pandemic norms and the ongoing conflict in Ukraine limiting the supply from Russia, has played a significant role in driving inflation. Additionally, the shortage of salad and vegetables in February led to a 45-year high in food inflation in the UK, further contributing to the overall increase in prices.
Source: Bank of England