The Bank of England has hiked interest rates by the most in 27 years and warned the UK will fall into recession.
Interest rates rose to 1.75% as the Bank battles to stem soaring prices, with inflation now set to hit over 13%.
Bank governor Andrew Bailey said he knew the cost of living squeeze was difficult but if it didn’t raise rates it would get “even worse”.
The main reason for high inflation and low growth is soaring energy bills. driven by Russia’s invasion of Ukraine.
A typical household will be paying almost £300 a month for their energy by October, the Bank warned.
The Bank’s governor Andrew Bailey said he had “huge sympathy and huge understanding for those who are struggling most” with the cost of living.
Increasing interest rates is one way to try and control inflation as it raises borrowing costs and should encourage people to borrow and spend less. It can also encourage people to save more.
However, many households will be squeezed further following the interest rate rise including some mortgage-holders.
Commenting on today’s BoE interest rate rise from 1.25% to 1.75%, the highest in over 25 years, Dr Liz Cameron CBE, Chief Executive of the Scottish Chambers of Commerce, said:
“This latest interest rate rise is a sign of the Bank of England’s drive to get inflation under control and was largely expected. Soaring prices are the biggest challenge facing businesses in Scotland and across the UK currently.
“The risk is that rising interest rates will cause demand growth to weaken further in the coming months, as people are encouraged to save which is hoped will cool supply demand. However, firms are still telling us that they are raising their prices now in response to record high costs for energy, labour, food and raw materials.
“Our latest research also indicates that most SMEs are holding back or pulling back investment, which does not bode well for growth prospects and long-term business confidence. While monetary policy begins to step up its response to the current economic climate, it must also come in hand with further support from government to ease the upfront cost burdens impacting businesses.”