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The ICAEW has warned that the Bank of England (BoE) is at risk of “overdoing” interest rate hikes following yesterday’s announcement that it has raised the rate for the 12th consecutive time to 4.5%.
The BoE’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to increase the rate by 0.25% in a bid to meet the 2% inflation target.
Suren Thiru, economics director at ICAEW, said the rate rise will “come as a nasty blow” to those already battling escalating borrowing costs and other severe cost pressures.
He said: “The Monetary Policy Committee needs to be more forward looking in setting interest rates rather than being overly focused on current inflation given the long-time lag between rate rises and its impact on the broader economy.
“With most of the interest rate rises yet to pass through to households and businesses, the Bank of England risks overdoing the rate hikes, adding to squeeze on our growth prospects and aggravating the cost-of-living crisis. Given that the Bank of England is still expecting inflation to fall back, the case for rate setters to pivot towards cutting interest rates is likely to strengthen.”
In yesterday’s announcement, the BoE said the pace at which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far.
It also said that UK-weighted world GDP is now expected to grow at a “moderate pace”, and that while risks remain, it expects there will only be a small impact on GDP from tighter credit conditions.
Thiru said: “The Bank of England’s latest forecasts paint a much more positive picture of the UK’s short-term growth prospects than their previous report. However, its medium-term projections suggest that our economic performance is likely to remain sluggish for the foreseeable future.
“The weak outlook for business investment is particularly concerning as it limits our ability to raise productivity, deliver a sustainably high wage economy, and if not addressed will continue to undermine the UK’s growth potential.”
