Time for a recap.

The governor of the Bank of England has said there are signs inflation was now beginning to come down from its 41-year high, shortly after raising UK interest rates to their highest level in 14 years.

Andrew Bailey said this week’s inflation data, which showed prices rose at a slower annual rate of 10.7% last month, was a ‘glimmer’ that inflation was coming down, and lower than the BoE had expected.

Bailey said the Bank expects inflation to start falling more rapidly from late next spring, but insisted that it had to raise rates today to offset pressures from a tight labour market.

He told broadcasters:

We expect inflation to start falling more rapidly, probably from the late spring onwards.

But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight

And that’s why, really, we had to raise interest rates today, because we see that risk as really quite pronounced.

Bailey was speaking after the Bank of England voted to raise UK interest rates for the ninth time in a row, to 3.5% from 3%.

But the decision was not unanimous, with two policymakers voting for no change and one arguing for a larger, 75 basis point, hike to 3.75%.

A majority of the Bank’s Monetary Policy Committee expect to keep raising interest rates at future meetings. The Bank also pointed out that the UK housing market appears to be weakening.

Economists predicted that UK interest rates could peak at 4.5% next year.

Today’s rate hike was criticised by the Unite union, while the Institute of Directors warned that the Bank risked prolonging the pain of the recession by tightening policy too much.

Here’s our news story on the Bank’s move:

The jump in borrowing costs means UK borrowers are facing a serious reality check, our economics editor Larry Elliott explains:

Here’s an explanation of what today’s rate hike will mean for mortgage-payes, other borrowers, and savers:

Here are today’s main other business stories, first on the UK’s industrial action:

Plus, the cost of living crisis:

And also:

High streets across the UK saw shopper numbers slump sharply early this week due to rail strikes and cold winter weather.

New figures from Springboard show UK retail destinations saw footfall decline by 8.6% from Monday to Wednesday compared to the same days last week.

The decline was particularly noticeable in high streets, where footfall dropped 15.1%.

On Tuesday and Wednesday, when thousands of rail workers took part in strike action in a long-running row over pay and conditions, high streets saw falls of 17.2% and 16.4% respectively.

Meanwhile, UK retail parks saw higher shopper numbers on these days as people opted to travel to out-of-town locations instead.

Central London was particularly dampened by a reduction of people travelling into the city, as footfall fell by 26.5% for the first three days of week, with 30.2% and 31.7% drops for Tuesday and Wednesday specifically.

Heathrow ground handlers suspend strike after improved pay deal, say Unite

Gwyn Topham

I flagged earlier that ground handling staff at Heathrow were set to strike tomorrow… but there’s been a significant development – an improved pay offer – since.

Strikes planned by hundreds of workers at Heathrow for Friday have been suspended, union leaders said, while it puts a revised pay offer to its members, as our transport correspondent Gwyn Topham reports.

However, further dates announced for action over the Christmas and new year period will stay in place pending the ballot.

Unite said the action was being suspended after last-ditch talks as a “gesture of goodwill”. Earlier, it announced that ground handlers at Britain’s biggest airport had rejected the latest “miserable” pay offer from their employer, Menzies, and called new strike dates.

A 72-hour strike beginning at 4am on Friday is now off. A further 72-hour strike is planned unless the deal is accepted, beginning on Thursday 29 December and ending at 3.59am on Sunday 1 January.

Here’s the full story:

Interest rate rises risk creating a “longer and deeper” recession, the IPPR thinktank fears.

Carsten Jung, senior economist at IPPR (and former Bank of England economist), has warned that the BoE risks “overtightening” monetary policy, and argues that policymakers should slow down:

“Interest rates had already increased significantly, and due to the time it takes for rises to be effective, most of the impact of these is yet to come. With the economy projected to slow significantly, there is a risk of overtightening, causing a “hard landing” for the economy in form of a longer and deeper recession.

We have previously argued that interest rates between 3 and 4 per cent would likely be sufficient to bring inflation back down; with rates now at 3.5 per cent the Bank should slow down rises to give time for the economics of this to play out.”

Andrew Bailey has told broadcasters that inflation is likely to start falling ‘more rapidly’ from the late spring next year.

Bailey pointed to the November’s drop in annual Consumer Prices Index, to 10.7% from 11.1% in October, as a ‘glimmer’ that inflation is easing.

He says, in an interview shown on Sky News, that:

We think we’ve possibly seen the first glimmer, with the [inflation] figures released this week, that it’s not only beginning to come down but it was a little bit below where we thought it would be.

That’s obviously very good news, but there’s a long way to go.

Bailey then explains that inflation is likely to fall more sharply next year. But he cautions that this isn’t guaranteed, which is why the Bank hiked borrowing costs today.

We expect inflation to start falling more rapidly, probably from the late spring onwards.

But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight.

And that’s why, really, we had to raise interest rates today, because we see that risk as really quite pronounced.

Bank of England governor Andrew Bailey has filmed a video clip in which he explains why the UK central bank has increased the cost of borrowing today.

Bailey says the Bank raised interest rates “because inflation is too high” (it was 10.7% in November, and hit a 41-year high the previous month).

He says:

We think it [inflation] will fall back quite sharply from the middle of next year.

And raising interest rates is the best way we have of making sure that that happens.

Bailay adds that “low and stable inflation is vital for a healthy economy” – one where people can plan for the future with confidence and where “hard-earned money keeps its value”.

He acknowledges that higher interest rates have a real impact on peope’s lives, but insists that raising interest rates, “we can bring inflation down sooner”.

Explainer: What Bank of England interest rate rise means for you

Rupert Jones

Today’s move is yet more bad news for the approximately 2.2 million people on a variable rate mortgage, who are already having to contend with a raft of rising costs.

Many now face paying hundreds of pounds extra a year, as my colleague Rupert Jones explains.

About half of those 2.2 million are either on a base rate tracker or discounted-rate deal. The other half are paying their lender’s standard variable rate (SVR).

A tracker directly follows the base rate, so your payments will almost certainly soon reflect the full rise. On a tracker now at 4.25%, the interest rate would rise to 4.75%, adding £40 a month to a £150,000 repayment mortgage with 20 years remaining.

This person’s monthly payment would rise from £929 to £969. As recently as June this year, this same individual would have been paying £776 a month – so their home loan bill has now jumped by 25% in just six months (assuming they have had their deal for a while).

Of course, for those with bigger mortgages, the numbers will be bigger. Up that mortgage to £500,000 and the payment will rise by £135 (from £3,095 to £3,230).

The Bank of England’s policymakers remain concened that inflationary pressures are building in the economy – citing recent price and wage increases.

The MPC says:

The labour market remained tight and there had been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justified a further forceful monetary policy response.

This week’s unemployment report showed that regular pay rose by a stronger-than-expected 6.1% in the August-to-October period, the biggest gain since records began in 2001.

The Bank of England is walking a narrow path, as it tries to limit inflation without causing an even deeper recession, says Josie Dent, Managing Economist at the CEBR think tank.

In particular, by raising rates, the Bank is increasing costs for the millions of households that will face higher mortgage costs from next year onwards. This will mean many of these households will have to cut back spending in other areas, leading to weaker economic activity.

However, concern was also expressed today that a tight labour market could lead to more persistent inflation, justifying further interest rate rises.”

Over in Frankfurt, the European Central Bank has followed the Bank of England – and the US Federal Reserve – by lifting its interest rates by half a percent.

It says:

The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further.

In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.

That takes the interest rate on the ECB’s main refinancing operations to 2.5%.

Economists agree that UK interest rates will probably rise further in the months to come, but disagree about where they will peak.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK predicts that rates will hit 4.5% in 2023.

The smaller 50bps hike, which takes interest rates to 3.5%, the highest level in 14 years, suggests the end is in sight for the BoE’s tightening cycle.

However, the minutes of the meeting made it clear that although the end is in sight, there are still more hikes to come. We expect rates to rise to 4.5% early next year and that they won’t start to be cut again until early 2024.

Paul Dales of Capital Economics also predicts the Bank will lift rates to 4.50% early next year before cutting them back to 3.00% in 2024.

There were three ways in which this felt a bit like another “dovish hike” from the Bank. First, in November seven MPC members supported the 75bps hike. Today only six members voted for the 50bps hike. Catherine Mann did vote 75bps. But Swati Dhingra and Silvana Tenreyro both voted for no change. They said “the current setting of Bank Rate was more than sufficient”.

Second, the passage in the statement in November on risks to inflation being skewed to the “upside” was dropped.

Third, the Bank dropped the section that pushed back strongly against market pricing that rates would rise to a peak of 5.25%, but that may just be because market rate expectations have since fallen back to 4.50%.

But analysts at ING predict rates will peak lower, at 4%.

In a note to clients, ING’s developed markets economist James Smith says:

For now, our best guess is the Committee implements another 50bp hike in February before calling it a day. The hawks can continue to point to 6% wage growth and the fact that core services inflation is running higher than expected in November.

But today’s meeting is a further demonstration of the delicate balancing act facing the BoE, between mitigating the risks of a tight jobs market on the one hand against mounting concerns about the housing market and the health of corporate borrowers on the other.

We expect Bank Rate to peak at 4% in the new year, although we aren’t yet convinced a rate cut will be as quick to follow as in the US (where we expect cuts shortly after the summer).