The markets were already predicting that the base rate would rise to this level as the central bank continues to tackle surging inflation. Unlike the past few base rate changes which resulted in higher mortgage pricing, lenders have been reducing rates in the run-up to the committee’s meeting as this has already been priced in.
However, expectations for the base rate going forward may change as a 0.5 per cent growth in GDP raised the prospect of a sharper increase with the expanding economy potentially putting pressure on inflation.
Inflation seems to be coming down from its peak however, as recent figures from the Office for National Statistics showed inflation fell to 10.7 per cent in November, down from 11.1 per cent in October.
The base rate increased on a vote of 6-3, with Swati Dhingra and Silvana Tenreyro voting to hold the rate at three per cent, and Cathering L Mann voting to increase it to 3.75 per cent. Dhingra and Tenreyro also voted for softer increases to the base rate at the committee’s November meeting when it rose to three per cent, with the former proposing it should be raised to 2.75 per cent and the latter suggesting 2.5 per cent.
It said the decision to raise the rate to 3.5 per cent was justified by a tight labour market and inflationary pressures in domestic prices and wages.
The committee acknowledged that the 10.7 per cent inflation rate reported for November was lower than expected, and said this was expected to fall gradually over the first quarter of 2023. It said energy prices continued to be the main contributor to inflation and this was predicted to stay elevated in the near term.
The MPC said if the economy developed in line with its expectations, further increases to the base rate “may be required for a sustainable return of inflation to target”.
It said the UK’s GDP 0.2 per cent decline in Q3 was a smaller contraction than its projection of a 0.5 per cent fall. It also said the monthly 0.5 per cent rise in GDP was stronger than it expected.
The MPC noted that the rates of fixed term owner-occupied mortgages had fallen since its last meeting, but were still higher compared to averages over the summer. It also said there was evidence of tightened lending criteria which had resulted in lower lending volumes.
