Bank of England raises interest rate to 1.25% in fifth consecutive hike - InterestRate.co.uk
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Bank of England raises interest rate to 1.25% in fifth consecutive hike

The Bank of England yesterday confirmed another interest rate hike of 0.25%, taking the rate to a total of 1.25% after five successive increases since December 2021. The increase comes as inflation rates also continue to rise in the UK.

The interest rate is now the highest level it’s been in 13 years. The Bank of England has warned that inflation could reach 11% by the autumn of this year, even with inflation rates currently sitting at a record 9%. Such inflation rates have not been seen in the last 40 years and would be more than five times the bank’s current inflation target of 2%.

As ever, the decision to raise interest rates was made by the Bank of England’s Monetary Policy Committee. The vote for the 0.25% increase won 6-3; three members voted for a 0.5% increase, which would have taken the overall rate to 1.5%.

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Increasing interest rates is traditionally a means of combatting steep inflation rates as it makes borrowing money more expensive in the long term, deterring people from doing so. Higher interest rates also encourage people to save as they get a better return on their cash in the bank.

Bank of England

Financial analysts expect these interest rates to continue to rise, and they forecast they could hit up to 3%. The Bank of England has also indicated that UK consumers should expect the rate to continue growing for the foreseeable future.

This rise in interest rates will affect those with a typical tracker mortgage or a mortgage taken at a standard variable rate. It’s estimated that those on a tracker mortgage will have to pay another £25 per month, on average. Those on a standard variable rate will see an average increase of around £16 on their monthly payments.

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Around three-quarters of the UK’s mortgage holders have fixed-rate plans. These will not be immediately affected by the increase in interest rates.

However, the rate increase alongside the continuing cost of living crisis is likely to have knock-on effects on other economy sectors, not least entertainment and hospitality.

Gulliver’s Theme Park Resorts managing director, Julie Dalton, said: “At the moment we’re not seeing it directly but we know we are a luxury.

“Past experience has told us when interest rates go up we do start to suffer.”

economic impact

Hefty inflation rates are mostly to do with the after-effects of the Covid-19 pandemic and, more recently, the war in Ukraine. Living costs have increased significantly and will continue to rise for most of 2022.

Furthermore, there will be a further increase in the price cap on household energy bills in October. The cap currently sits at £1,971 per year, but in the final three months of 2022, economists say this may increase to as much as £2,800.

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Despite the increased cost of living, the Bank of England has discouraged an increase in wages. The call for restricting wage increases comes as the Bank fears it will exacerbate the rising inflation rates. Many unions have expressed their disagreement, saying that the rise in prices is not the fault of their members.

The CBI’s lead economist, Alpesh Paleja, commented: “With inflation high and price pressures remaining acute, the Bank of England has rightly raised interest rates again to anchor inflation.

“But with the outlook looking weaker, monetary policy is walking an increasingly fine line between taming inflation and supporting economic activity.”

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