Should the Bank of England have raised interest rates again?

The Bank of England (BoE) has raised interest rates for the 14th time in a row as it tries to get a grip of UK inflation.

The latest increase to the base rate of interest, from 5% to 5.25%, puts it at the highest it has been since April 2008.

Bringing the cost of living crisis under control is a big priority of the Bank, which is concerned that inflation is well above its target of 2% and much higher than other major economies.

The theory is that raising interest rates makes borrowing more expensive, encourages saving, discourages spending, reduces demand and therefore helps slow down price rises.

However, others argue that the UK still faces the prospect of dipping into recession, arguing now is not the time to be imposing measures that cool the economy down.

Speaking after the announcement of the rate's hike, BoE governor Andrew Bailey explained the Bank had opted for a "restrictive" monetary policy as inflation hurts lower-income households the most.

“We do recognise, and I think it’s very important to say, that inflation has a very serious effect particularly on those least well off," he added.

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The main components of inflation, energy and food, make up a bigger portion of spending for lower income families, Bailey added.

“But I will emphasise that the economy is more resilient. Yes unemployment has gone up a bit, but it is still at historically low levels. We haven’t experienced a recession and we’re not forecasting one.”

However, others were less optimistic about the state of the economy. Earlier, the Trades Union Congress (TUC) warned that a wave of recent job losses has left Britain "teetering on the brink of recession".

While the total number of jobs in the whole economy increased by 30,000 between March and June, the TUC pointed to significant job losses in key sectors (34,000 for accommodation and food, 27,000 for wholesale and retail, 17,000 for construction).

Read more: TUC urges Bank of England to halt ‘reckless’ interest rate increases

It also said figures from the Office for National Statistics Labour Force Survey showed unemployment had increased by 274,000 between April and May – the steepest rise on the month since records began in 1992.

The TUC said: "The last thing we need is another hike in interest rates, putting many thousands of more jobs at risk.

"Ministers must stop hiding behind the Bank of England and come up with a credible economic plan for boosting jobs, growth and pay."

Free market think-tank the Institute of Economic Affairs had also urged the bank to reconsider. Chairman of its shadow monetary policy committee, Trevor Williams, warning the measure was “unnecessary and could do some economic damage without lowering inflation any faster”, the BBC reported.

UK inflation is expected to drop below 5% in the final few months of 2023, allowing the prime minister to meet his target of halving inflation by the end of the year, according to new projections from the BoE.

The Bank predicted that consumer prices index (CPI) inflation will fall to 4.9% in the final quarter and remain above 2% until mid-2025.

The recent easing of price rises has been driven largely by a fall in international energy prices, which are set to reduce the average UK household’s energy bill to below £2,000 a year by October.

Read more: Campaigners gather outside Bank of England against the rises in interest rates amid the cost of living crisis

Commenting on Wednesday's decision to raise rates to 5.25%, Labour's shadow chancellor Rachel Reeves said: “This latest rise in interest rates will be incredibly worrying for households across Britain already struggling to make ends meet.

“The Tory mortgage bombshell is hitting families hard, with a typical mortgage holder now paying an extra £220 a month when they go to re-mortgage."

Speaking about the impact on consumers, Sarah Pennells, consumer finance specialist at Royal London, said: “Given the recent news of lower inflation hard-pressed mortgage holders will be disappointed that the Bank of England didn’t leave the base rate untouched.

"With the speed at which interest rates had been rising, the higher repayment amounts, for some, will be unaffordable or a huge stretch on their finances."

Read more: Bank of England preparing to raise interest rates to fresh 15-year high

Meanwhile, Giles Coghlan, chief market analyst, consulting for HYCM, was more optimistic.

He said: “Despite concerns about economic growth, today’s hike is yet another sign that the central bank’s quantitative tightening could be nearing completion, and we should see the hiking cycle soon coming to a halt, with more modest hikes in the pipeline until then."

Watch: Bank of England increases rates to 5.25%

Late last month, the bank's governor Andrew Bailey warned inflation is “still too high", adding that "we’ve got to deal with it".

He said the current level of wage increases was unsustainable, and pointed the finger at retailers building up profits through higher prices.

Read more: Can you guess how much house prices have changed?

Bailey added: "We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”

The governor also denied that the Bank is trying to bring about a recession to control inflation, despite suggestions that it could be a tactic to put a lid on price rises.

He stressed: “We’re not expecting, we’re not desiring a recession, but we will do what is necessary to bring inflation down to target."