Bank of England base rate rises by a further 0.25 percentage points

The Bank of England’s top economists have agreed a further 0.25 percentage point increase in its base rate of interest, which now stands at 4.5%.

The bank’s Monetary Policy Committee (MPC) have followed in the footsteps of the US Federal Reserve and the Eurozone’s European Central Bank in raising interest rates in a bid to combat persistent high inflation in the global economy.

The Consumer Price Index, the UK’s key measure of inflation, remained above 10% in April, exceeding projections that inflation would begin to slow in 2023 and well above the Bank of England’s 2% target. While some key drivers of inflation, particularly motor fuel and energy prices are beginning to drop, food prices, rising at their fastest rate since the late 1970s, are anticipated to continue to rise in the coming months. Despite this, the UK’s outlook for economic growth has exceeded expectations with the country narrowly avoiding a technical recession.

The latest increase in interest rates is the 12th consecutive increase by the MPC, and brings the base rate back to levels last since in October 2008, in the midst of the global financial crisis and ends more than a decade of close-to-zero interest rates. Previous predictions made prior to April’s CPI figures being published had expected interest rates to remain frozen as the rate of inflation began to fall.

Raising interest rates aims to reduce the availability of credit, and therefore cash, in the economy, helping to ease inflation, but this must be balanced against the impact on the economy of reduced spending.

The interest rate rise is likely to cost homeowners on variable rate mortgages between £15 and £25 more a month on average, according to estimates by the BBC. Savers, however, will see some benefit from increase to interest rates if this is passed on by banks and building societies, although as inflation remains high, investments will continue to lose value in real terms.