Interest rates rise to 5.25%

The Bank of England has raised its base interest rates to 5.25%, their highest level in 15 years as it continues to respond to high inflation.

The latest 0.25 percentage point rise represents the fourteenth consecutive decision by the Bank’s Monetary Policy Committee to increase the base rate of interest, which surpassed 5% in June for the first time since before the 2008 financial crisis.

Economists on the Bank’s MPC voted 6-3 in favour of the increase, with one of those opposing the rise preferring the base rate be held at 5%, and the other two voting for a 0.5 percentage point increase.

While the fall in inflation annoucned last month to 7.9%, the CPI remains well above the Bank of England’s 2% target. Current projections by the Bank expect inflation to fall to around 5% by the end of the year, and return to 2% by the second quarter of 2025. The Bank of England’s forecast also anticipates that interest rates will cap out at just over 6%, indicating further interest rates rises are still to come during the rest of the year. Expectations are also that higher rates will persist through to at least 2025 when inflation returns to target levels.

The latest rise will be further bad news for those facing further increases to their mortgage payments, with borrowers in London and the South East where house prices are higher the worst hit. The increases in interest rates on shorter-term lending such as credit cards, which is typically much higher, has yet to trickle down. Interest rates for savers continue, however, to trail behind inflation, although banks are facing increasing pressure to pass rate increases on to customers.

As well as affecting consumers, the increase in interest rates will also see the government charged a higher interest rate on its debts, putting pressure on public spending as the Treasury is forced to spend more on servicing the national debt.

HMRC has also updated its interest on late payments in line with the Bank of England’s base rate, which will increase from 14th August for quarterly instalment payments, and 22nd August for non-quarterly instalments payments.

As a result of the latest base rate rise, HMRC will now charge 7.75% interest on late payments.

HMRC is also updating its rate of repayment interest, paid on money being refunded to taxpayers who have overpaid. Repayment interest is set at base rate minus 1% with a lower limit, or ‘minimum floor’, of 0.5%; it is now set it 4.25%.