The 0.75 per cent jump from its level of 2.25 per cent marked the largest increase since 1989. This is also the highest the base rate has been since November 2008, when it was also three per cent.
The latest rise signifies the eighth consecutive increase to the base rate as the central bank works to tackle climbing inflation.
The base rate increased on a vote of 7-2, with one member – Swati Dhingra – voting for a softer rise of 0.5 per cent which would have taken the rate to 2.75 per cent.
Dhingra said a “gradated approach” to monetary policy was warranted to avoid overtightening as the impact of the cost of living crisis was already taking hold of the economy. She argued that a smaller rate increase would protect the economy from a “longer and deeper recession”.
Another member – Silvana Tenreyro – voted for an even lighter touch of a 0.25 per cent increase, which would have put the base rate at 2.50 per cent.
Tenreyro said monetary policy had already been restrictive regarding the fall in real incomes and the economy was already possibly in a recession. She also said previous monetary tightening was yet to feed through to the economy,
Ultimately, it was agreed that a larger increase in the base rate now would bring inflation back to its two per cent target sustainably in the medium term, and reduce the risks of extended and costly tightening later.
The MPC also said if there were more inflationary pressures, they would “respond forcefully” if needed.
The economic backdrop
The MPC said in the days leading up to the November decision, the UK financial markets had stabilised. However, it noted that other major economies such as Europe and the United States had tightened monetary policy since the September meeting, despite sharper falls in risky asset prices occuring in the UK.
The committee said in the week before the meeting market expectations predicted the base rate would peak at 5.25 per cent in Q3 next year, but in the immediate run-up to the meeting, it was implied that this would hit 4.75 per cent by the second half of next year.
Since its last meeting in September, monthly GDP was estimated to have fallen by 0.3 per cent in August and other market indicators such as retail sales and consumer confidence had declined.
The MPC’s projections for the UK economy were described as “very challenging” as it expects a recession to be prolonged and inflation to remain above 10 per cent in the near term, then fall sharply by mid-2023.
