Interest rate hiked and Bank of England warns inflation squeeze will get worse as Ukraine war drives up energy prices

The Bank of England has warned the inflation squeeze on households will intensify further this autumn after Russia’s invasion of Ukraine added to the pressure on energy prices.

Surging inflation – now expected to hit 8% next month – prompted the bank to hike its interest rate by 0.25 percentage points to 0.75%, taking it to its pre-pandemic level.

But instead of peaking in April, the rate of consumer price increases is forecast to hit an even higher level in October that could be “several percentage points” above what was pencilled in just last month, the bank said.

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Why commodities surge is driving up inflation pressures

The spike in inflation expected next month is driven by a 54% rise in Ofgem’s energy cap, prompted by surging wholesale energy prices, that is set to come into force.

But Russia’s invasion of Ukraine has driven wholesale prices even higher – and that could mean bills going up by a further 35% when the cap is reset in October, according to the bank’s monetary policy committee (MPC).


The MPC said that developments since its last set of economic projections in February were “likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes”.

That is notable because the bank was already predicting last month that, even before the impact of the war, households were facing a real terms fall in income of 2% this year – the biggest since comparable records began three decades ago.

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The latest remarks pointed to the increase in commodity prices including food as well as energy since Russia’s invasion, which it also said would exacerbate global supply chain disruptions “and has increased the uncertainty around the economic outlook significantly”.

Economic growth in countries that are net energy importers, including the UK, was likely to slow, the MPC said.

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The bank thinks UK GDP will have grown slightly better than previously expected in the first quarter of this year as it emerged from Omicron restrictions.

But there were also “tentative signs that the squeeze on real disposable incomes was starting to weigh on the household sector”.

The bank’s interest rate hike is the third increase in a row in as many policy meetings.

It was slashed to 0.1% two years ago as officials took emergency action to try to cushion the economy and financial markets from the COVID-19 downturn and was increased in both December and February.

The hikes directly affect around two million home owners with variable rate mortgages.


Business correspondent


When the Bank of England’s monetary policy committee met to consider interest rates last month Ukraine was not even mentioned.

What a difference six weeks make.

At Wednesday’s meeting of the Bank’s decision makers the Russian invasion was in the first line of the minutes, the Bank taking the unprecedented step of commenting on geopolitics, condemning Russia’s “unprovoked invasion”.

“The invasion of Ukraine has led to further large increases in energy and other commodity prices including food prices,” the committee conclude.

“It is also likely to exacerbate global supply chain disruptions, and has increased the uncertainty around the economic outlook significantly.

“Global inflationary pressures will strengthen considerably further over coming months.”

The dramatic shift in focus in a few short weeks demonstrates just how completely the advent of all-out conflict, and the wave of sanctions imposed on Russia in response, has upended economic expectations for the year ahead.

Inflation is already at a three-decade high at 5.5% – compared to the bank’s target of 2%.

The MPC has acknowledged that the shock caused by Russia’s invasion of Ukraine will hit economic growth as well as driving up inflation.

That means it faces a careful balancing act between raising rates to cool price rises without moving so sharply that it risks helping tip the UK into a renewed downturn.

Analysts saw some softening of the language used by the MPC in the minutes of its latest meeting, in which its members voted for the rate hike by an 8-1 majority, about the prospects for further increases over coming months.

It said it “judged that some further modest tightening might be appropriate in the coming months, but there were riskson both sides of that judgement depending on how medium-term prospects evolved”

CBI lead economist Alpesh Paleja said: “The MPC are clearly making moves to counter growing inflation.

“But they will be walking a tightrope in the months ahead.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Today’s minutes leave us more confident in our view that the rate hiking cycle will stall after the Committee increases Bank rate to 1%, most likely at the next meeting in May.”