LAST week’s rise in benchmark UK interest rates – the first for more than three years – was hailed by some as a surprise.

However, given the astounding surge in annual consumer prices index inflation unveiled the day before the December 16 announcement by the Bank of England of a rise in base rates, the increase in borrowing costs was not really a shock at all. Especially given the Bank now expects annual UK CPI inflation to reach around 6 per cent next spring – a figure that would only months ago have been almost inconceivable but is no longer so given how far prices have surged already and with further hikes in household energy bills in prospect.

What was striking was the speed with which financial market expectations turned in the immediate wake of the figures on Wednesday last week from the Office for National Statistics showing a surge in annual inflation from 4.2% in October to a 10-year high of 5.1% in November. Annual inflation was 3.1% in September.

Economists had expected the November inflation rate to be high, with the consensus forecast in a poll by Reuters being for a jump to 4.7%. However, the actual extent of the surge was a huge surprise, with the annual inflation rate for November being more than two-and-a-half times the 2% target set for the Bank of England by the Treasury.

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In the immediate aftermath of the inflation figures on Wednesday last week, investors put a much-increased probability of about 60% on a rise in base rates to 0.25%, according to analysis by Reuters. And this was the increase which was eventually unveiled by the Bank of England the following day.

In the end, the vote was in terms of numbers not even that close. Eight of the Bank’s nine-strong Monetary Policy Committee voted for the rise in base rates, with only external member Silvana Tenreyro preferring to hold at the record low of 0.1%.

Having said that, after a protracted period in which interest-rate decisions did not really attract much debate or excitement, the recent renewed drama around borrowing costs culminating in last week’s rates decision has been noteworthy. And the minutes of the MPC meeting last week highlight the point that the decision on rates was “finely balanced because of the uncertainty around Covid developments”.

The minutes state: “There was some value in waiting for further information on the degree to which Omicron was likely to escape the protection of current vaccines and on the initial economic effects of this new wave. There was, however, also a strong case for tightening monetary policy now, given the strength of current underlying inflationary pressures and in order to maintain price stability in the medium term. The economic impact of the new variant could, in some scenarios, increase these inflationary pressures further.”

What had appeared to be a dovish speech from external MPC member Michael Saunders in early December, as the Omicron variant of coronavirus emerged, had previously reduced expectations of a rise in interest rates at last week’s meeting.

Mr Saunders, who had voted for a rise in benchmark UK interest rates in November, said on December 3: “In considering if and when to adjust rates, there is always a case to wait and see more data. At present, given the new Omicron Covid variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy.”

However, citing what was even by then “well above target” inflation and potential for a highly accommodative monetary policy stance to allow the labour market to tighten further, he declared that “continued delay also could be costly”.

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These comments, of course, preceded news of the jump in inflation in November. Although fuelled partly by a record monthly surge in petrol prices to an all-time high, the increase was broadly based.

Upward pressure on annual inflation came from electricity and gas bills and from other categories including food and non-alcoholic beverages, clothing and footwear, and alcohol and tobacco, the ONS figures showed.

Announcing the rise in interest rates on Thursday last week, the Bank of England said there had been “significant upside news in core goods and, to a lesser extent, services price inflation” relative to its projections in the November monetary policy report.

It added: “Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022, with that further increase accounted for predominantly by the lagged impact on utility bills of developments in wholesale gas prices. Indicators of cost and price pressures have remained at historically elevated levels recently, and contacts of the Bank’s agents expect further price increases next year driven in large part by pay and energy costs.”

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While the Bank observed “CPI inflation is still expected to fall back in the second half of next year”, the pressure on household finances of a 5.1% and likely before too long a 6% inflation rate must not be underestimated.

Given how far inflation has surged, and where it is projected to go, it is easy to understand why the Bank of England raised base rates.

The EY ITEM Club think-tank and fund management group abrdn projected in the wake of last week’s increase in borrowing costs that UK base rates would rise to 0.75% by the end of next year. This would take them back to where they were before they were cut in March last year as the coronavirus pandemic took hold.

However, abrdn economist Pietro Baffico warned “the risks for investors remain skewed towards a faster tightening cycle, especially if we continue to see inflation surprise to the upside”.

The UK Government, for its part, must try to recognise the pressure on households from the surge in inflation, higher interest rates and tax hikes.

This pressure is very great indeed, and the potential for it to dampen UK economic recovery is clear.

An annual inflation rate of 6%, around where the Bank of England now expects the peak, would be 15 times the 0.4% figure as recently as February this year.

The Johnson administration, with the usual Tory impatience about the public finances and lack of recognition that premature fiscal tightening efforts can actually be counter-productive for the coffers by weighing on growth and tax revenues, has decided to hammer households and businesses with national insurance hikes. This move, effective from next April, is dressed up as a health and social care levy but it is in essence simply a sharp and painful rise in taxes, at the most difficult of times.

In this context, though, we should remember this is a Government which removed the £20 per week universal credit uplift for low-income households at a time of continuing crisis. It also chose to damage the economy and living standards over years and decades with its hard Brexit.

So one thing we should absolutely not be surprised about is that the Johnson administration seems entirely unperturbed about the impact of its policies on ordinary people’s finances and living standards, and on the economy.