BoE interest rate hike to impact UK households

The United Kingdom's central bank raised its base interest rate by half a percentage point on Thursday, from 1.75 percent to 2.25 percent.

The rise, which took the rate to its highest level since November 2008, was the seventh since December.

The move — made by the Bank of England's Monetary Policy Committee, or MPC — was aimed at cooling rampant inflation triggered by fast-rising fuel prices and global shortages that has created a cost-of-living crisis in the UK.

The MPC had been poised to adjust the interest rate on Sept 15 but held back because of the death of Queen Elizabeth II.

James Smith, an economist at the Dutch multinational banking and financial services corporation ING, told The Evening Standard newspaper the MPC needed to take action after recent falls in the value of the pound, which fell to a 37-year low against the dollar last week.

He said the hike indicates "not only how worried policymakers are about the slide in sterling and other UK markets, but also how the government's decision to cap household/business energy prices will translate into monetary policy".

He said the MPC will likely push the base interest rate even further up in November and December, possibly to as high as 3 percent. The Times newspaper said it believes it could even hit 4 percent by year's end.

Inflation in the UK is running at 9.9 percent — the highest rate for 40 years — and experts believe it could even hit 13 percent by the end of the year if effective action is not taken.

The Bank of England has set itself the target of getting inflation back to 2 percent and holding it there.

Interest rate hikes, while effective at cooling inflation, are not without risks. They also push up the price of mortgages and of lines of credit, which can leave millions of British households worse off. They also encourage people to save, instead of spend, which dents the manufacturing and service sectors.

As the bank took action to try to cool inflation, a former deputy governor of the Bank of England said Prime Minister Liz Truss's planned package of 30 billion pounds ($34 billion) of tax cuts set to be unveiled in a mini budget on Friday could negate the effort.

John Gieve said the bank and the government seem to be pulling in opposite directions.

He told The Times newspaper:" (The MPC is) trying to slow down the economy. The rhetoric we've heard so far from the new government is that they want to speed it up by increasing borrowing."

Pundits will be closely watching to see if inflation and high prices persist and force the UK economy into recession, which the bank conceded on Thursday may have even happened already.