The invasion of Ukraine has intensified global inflationary pressures, leading the prices of essential goods such as food and energy to rise sharply.
As a result of these global pressures, household real incomes and business margins in the UK have fallen, restricting consumer spending and business investment.
As a result of high inflation, the BoE has raised base* interest rates. Tight monetary policy is the traditional response to high inflation by raising interest rates or restricting the money supply. This in turn makes consumer and business spending more expensive, reducing demand and damping-down price change.
Tightening monetary supply and weak economic growth will strain households and businesses with significant levels of debt, due to higher repayment and lower incomes. It is expected that households and businesses are likely to be less resilient to shocks over the coming months (eg; job loss, illness, unexpected bills).
In addition, countries with high levels of government debt are likely to be impacted by poor growth and rising interest rate. It was noted that some countries across the Eurozone have seen sharp increases in interest rates on government debt.
The BoE believes that the UK financial system remains resilient in the face of increased market volatility. Businesses and households willing to access credit remain able to do so.
This report comes in advance of the next BoE Monetary Policy Committee (MPC) meeting which is scheduled for 4 August. It is expected that the MPC will vote then to raise interest rates above the current 1%.
* Base interest rates are the lowest rate at which credit may be offered – actual rates will be higher
More economic news and analysis
Sign up to our bulletin
Our round-up of the latest economic and political news, focused on FMCGs