Interest rates reach 4% after tenth consecutive rise

The Bank of England’s Monetary Policy Committee (MPC) has voted to once again increase interest rates, with the Bank’s base rate now set at 4%.

The latest rate rise is the tenth consecutive increase announced by economists at the UK’s central bank, which is continuing to use its power over interest rates to attempt to reign in high inflation, which fell slightly in December to 10.5%.

The Bank of England’s MPC voted 7-2 in favour of the increase 0.5 percentage point increase, with two members voting to hold rates at 3.5%. The increase sees rates reach their highest level in 14 years, but still below the typical rates seen prior to the 2008 credit crunch and well below the double-figure interest rates of the 1980s. The Bank’s economists are following in the footsteps of central banks worldwide in raising interest rates in response to high inflation, however, the Bank of England is now forecasting inflation to slow to 4% by the end of 2022, and that a UK recession will not be as severe as previously estimated.

The Bank of England is required to bring down and inflation to its 2% in the medium-term. While pressure on prices has largely been attributed to rising energy and food costs because of the Russian invasion of Ukraine, the Bank of England can increase interest rates to slow borrowing and slow the flow of money entering the UK economy and raising its relative value compared to goods and services. Current forecasts predict interest rates will cap out at 4.5% later this year.

Interest rates have been at historic lows since the 2008 financial crisis, when the Bank of England began a programme of quantitative easing to inject cash into the economy, stimulate growth and prevent deflation of prices that would have caused consumers and businesses to delay spending. The Bank of England has begun winding down its programme of quantitative easing to further control inflation, although this process stalled in Autumn 2022 when the Bank intervened to stabilise government bond markets during Liz Truss’ premiership.

The latest increase to interest rates sees the Bank of England continue to attempt to balance controlling inflation with higher borrowing costs that may put additional pressure on household finances. The BBC has reported prior to today’s announcement that 4% interest rates will see typical monthly mortgage repayments jump by as much as £49 for borrowers who are not on a fixed-rate mortgage.

Savers will also continue to see the value of their savings fall in real terms, despite the rise, as interest rates remain below the rate of inflation, even if banks and building societies pass on the rate rise to their customers and members.