Bank of England confirms interest rate rise to 1.75% as inflation to hit 13% –

Boris Johnson and chancellor Nadhim Zahawi are on holiday despite warnings of the economy entering the longest recession since the financial crisis.

With ministers taking a back seat as the Tory party is gripped by the leadership contest, both men were away from Westminster when the Bank of England detailed the brutal outlook earlier today.

Mr Zahawi insisted he was still working and had a call with Governor Andrew Bailey after interest rates were hiked from 1.25% to 1.75%, the biggest increase for 27 years.

But Labour accused the chancellor and the Prime Minister of being “missing in action” as the cost-of-living crisis deepened further, with the Bank forecasting inflation could peak at 13.3%.

In a statement, Mr Zahawi said: “For me, like I’m sure lots of others, there is no such thing as a holiday and not working. I never had that in the private sector, not in government.

“Ask any entrepreneur and they can tell you that. Millions of us dream about getting away with our families but the privilege and responsibility of public service means that you never get to switch off, that’s why I have had calls and briefings every day and continue to do so.”

Oliver Chapman, CEO of supply chain specialist OCI, said the bank was “too late” in increasing interst rates.

He said: “There are always time lags between a change in interest rate and the full economic impact. So what the Bank of England does now will still be affecting the economy in 18 months. And in 18 months, inflation may be a lot lower anyway.

“Clearly, the bank was too late in increasing interest rates. UK rates have been increased by half a percentage point to 1.75 per cent. They were still at only 0.15 per cent as recently as the beginning of this year. The bank should have begun increasing rates much sooner, and more aggressively and then maybe the peak interest rate would have been much lower than now looks likely.”

Mr Chapman also suggested market conditions are not supporting the Bank of England’s latest move.

“The supply chain reacts slowly to external shocks. But it does react. And we are now seeing that reaction. Brent Crude oil is now 20 per cent down on the year high. The lumber price is 40 per cent off the year high. The wheat price is down by a third from the level three or so months ago, and corn is down by around a quarter. The copper price has fallen sharply in recent weeks too.

“It will take time before recent falls in commodity prices show up in the inflation data, but bear in mind that for inflation to persist year on year, prices must continue to rise. Instead, commodity prices are now falling.

“The rationale for higher rates is partly to counteract any inflationary effect that higher wages might have, but inflation will probably be falling sharply by the time the latest hike has its full impact.”

The Bank of England’s Ben Broadbent dismissed suggestions the increase in interest rates was a “sledgehammer” and said there were some signs of domestic inflationary pressures such as rising wages and prices.

The deputy governor said the vast majority of the factors driving up inflation were global ones, particularly those linked to the Ukraine war, “but they are not the whole of it”.

In the face of an “enormous external hit” to the economy “I think it was to be expected that to some degree households would want to protect their real incomes by asking for more pay and firms would want to protect their real profits by seeking compensatory rises in their own prices”.

“We have seen far less of that, I would argue, because of the monetary regime we have than we did in earlier decades, despite what was a much bigger shock, but we have seen some,” he said.

But “I wouldn’t describe what we have done as a sledgehammer, I would describe it as an appropriate response to what we are seeing in that respect, to the signs of more domestic inflation”.

Labour’s Rachel Reeves has said the Bank interest rates hike is “further proof” that “the Tories have lost control of the economy”.

The shadow chancellor tweeted: “As families and pensioners worry about how they’re going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis.”

Brian Coulton, chief economist at Fitch Ratings, said the Bank has “finally joined the large club of central banks making outsized interest rate hikes”.

“This will probably not be the last 50 basis point move – interest rates will likely have to stay above neutral for quite a while even if there is a recession.”

But it is thought the Bank may look to pause after one or more hikes, with ING believing rates may peak at 2.25% to 2.5% later this year.

Experts also said they believe the Bank’s grim outlook for the economy may end up being overly pessimistic, if the UK’s jobs market remains resilient and with the prospect of further government support on the horizon.

Martin Beck, chief economic adviser at the EY Item Club, said: “The Bank’s forecast of a protracted recession is conditioned on interest rates rising to a level which seems unlikely were predictions for shrinking activity and rising joblessness to be in danger of materialising.

“And there is a near-inevitable prospect of further government support to households later this year – above and beyond what has already been announced – to offset some of the impact of higher energy bills.”

James Smith, developed markets economist at ING, said it is a “strong possibility” that rates may rise again, to 2.25% next month, even though the Bank is forecasting a 15-month recession from the fourth quarter.

It would follow the biggest rate increase in 27 years, from 1.25% to 1.75%, on Thursday and signals the Bank’s worries over rampant inflation, which is now predicted to rise above 13% later this year.

Bank Governor Andrew Bailey said “all options” are on the table for next month, though he sought to stress that “policy is not on a pre-set path, and what we do this time does not tell you what we’re going to do next time”.

But Mr Smith said: “The fact that the Bank reiterated its willingness to act ‘forcefully’ to curb inflation, we think there’s a strong possibility of another 50bp (basis point) hike in September – particularly if that’s what both the Fed and European Central Bank end up doing too.”

He went on: “The fact that the Bank is stepping up the pace of rate hikes while also forecasting a meaningful recession shows just…