The Bank of England’s decision to raise interest rates to 4.5%, the highest level since late 2008, is an attempt to combat inflation in the UK. The bank’s Monetary Policy Committee had previously raised interest rates 11 times in a row and the latest hike was widely anticipated in financial markets. The committee has been trying to keep a lid on inflation, which has been fuelled by a range of factors including Russia’s invasion of Ukraine and the resulting increase in energy prices. As a result, prices for a wide array of goods and services have also risen.
Higher interest rates have the potential to help lower inflation by making borrowing more expensive for households and businesses, potentially reducing demand pressure on prices. The bank expects that inflation will likely halve from current levels to around 5% by the end of this year. However, food prices have remained higher than expected, partly due to Russia’s war in Ukraine and poor harvests in some European countries. As a result, inflation is expected to decline less rapidly this year than previously thought.
The interest rate hike is expected to put more pressure on borrowers, particularly those with mortgages that track the bank’s headline rate. While many homeowners will be cushioned from the recent increases because they fixed their mortgages when interest rates were ultra-low during the coronavirus pandemic, those whose fixed rate terms expire over the coming months will face much higher borrowing rates when they look to lock in new deals.
Despite the improved growth outlook, the bank isn’t expecting a big rebound. Governor Andrew Bailey has stated that the level of growth is still weak and that the bank is “not giving a directional steer” on whether interest rates will rise again. Financial markets believe there could be possibly one or two quarter-point increases in this current cycle, though much will depend on the speed at which inflation declines over the coming months.
The Bank of England’s move to raise interest rates is in line with other central banks around the world that have sought to tackle rising inflation. However, some analysts have expressed concern that the move could lead to a slowdown in economic growth, particularly as the UK’s economy is still recovering from the impact of the pandemic. The decision to raise interest rates will also have an impact on the government’s borrowing costs, potentially leading to higher costs for public services and investment.
Overall, the Bank of England’s decision to raise interest rates is an attempt to combat stubbornly high inflation in the UK. While it remains to be seen whether the move will have the desired impact on inflation, it is likely to put more pressure on borrowers and could potentially lead to a slowdown in economic growth.