The Bank of England Raises Rates Again to Curb Inflation

On Thursday, the Bank of England raised interest rates from 0.5 per cent to 0.75 per cent in an attempt to fight the soaring forecasted 8 per cent inflation which is predicted to hit by the end of June. This marks the third increase in four months. The rate rose from the record low 0.1 per cent to 0.25 per cent in December 2021, and again to 0.5 per cent last month, before the Bank increased it to 0.75 this week.  

The necessity of raising rates stems from the need to keep current and predicted price rises under control. The UK inflation rate increased to 5.5 per cent in the year to January 2022, up from 5.4% the month before. This put pressure on the Bank of England to increase interest rates to try to slow down rising inflation.

The Monetary Policy Committee has said that it expects inflation to rise about 8 per cent in the second quarter of 2022. However, there is potential for this to increase even further in October, when regulated energy prices are set to rise again, something which could cause inflation to rise temporarily into double digits before the end of the year.

In a meeting by the MPC, eight of the nine members voted to raise rates to reduce the risk that businesses and households will be expected to experience. The committee also emphasised that while business confidence and the jobs market remained strong, consumer confidence was on the decline and the pressure on individual household incomes were set to be larger than initially expected in February, when the forecast showed 1 percentage point lower than current expectations. As a result, it was discussed that “further modest tightening in monetary policy” may be needed over the coming months, however, as there are risks involved, it was concluded that developments would be closely reviewed in the light of incoming data before any update is published to the forecasts in May.

However, it is not just the UK that is experiencing rising inflation. In February, US inflation surged to its highest level since 1982 to 7.5 per cent. Experts have now predicted that the Federal Reserve will raise interest rates to 2 per cent by May 2023, a number which is higher than the previous expectation of 1.75 per cent.

For individuals, an increase to the interest rate effectively means it will cost more to borrow from lenders and may encourage people to save money rather than spend it. The good news is that a rise in interest rates could lead to more competitive savings offers coming to the market. Now that the base rate has increased from its record low, some of the top-paying savings accounts have also increased the interest customers can earn.