Bank of England Implements Aggressive Interest Rate Hike for First Time in a Decade.
Bank of England Raises Interest Rates Highest Since 2008
On Thursday, the Bank of England announced that it had raised interest rates by a quarter of a percentage point to 4.5%. The increase is its 12th in a row and the highest level since late 2008. Given the bank’s continued efforts to combat inflation, the decision had been anticipated in financial markets.
What’s Driving the Interest Rate Hike?
The central bank has been raising interest rates since late 2021, when rates were at a low of 0.1%, to keep inflation in check. Over the past year, inflation has been driven by the Russian invasion of Ukraine, which sent energy prices soaring, leading to price increases in various goods and services across the UK. Higher interest rates help lower inflation by making borrowing more expensive for households and businesses, reducing demand pressure on prices.
While inflation is expected to be around 5% by the end of the year, the bank predicts that the energy price backdrop will eventually help to lower inflation levels. However, it raised concerns about food prices remaining higher for longer than expected, partly due to Russia’s war in Ukraine and poor harvests in some European countries. Therefore, inflation is expected to decline more slowly this year than predicted.
Impact on Borrowers
The immediate impact of the interest rate rise will likely be felt by borrowers, particularly those with mortgages tied to the bank’s headline interest rate. Although many homeowners will be cushioned from recent increases, owing to fixed mortgage rates during the coronavirus pandemic, those whose fixed rate terms expire over the next few months will face significantly higher borrowing rates when seeking new deals.
In the UK, homeowners typically fix their mortgage rates for shorter periods, usually a few years. However, it’s worth noting that in the current context, those who set their mortgage rate at less than 1% three years ago could see a five-fold increase in their speed.
The British Economy and the Bank’s Outlook
The bank does not expect the UK economy to slip into a recession this year, partly due to the recent fall in energy costs, increased economic activity in China, and a more favorable environment in Europe. But, as per Bank of England Governor Andrew Bailey, “The level of growth is still weak, let’s be honest.”
- The Bank of England began raising interest rates in late 2021 and has increased them by 12 consecutive times.
- The Bank of England’s main objective is to maintain price stability, keeping inflation under control.
- The UK inflation rate rose to 3.2% in August 2021, the highest in almost a decade.
The Bank of England’s recent move to hike the interest rate reflects its continued efforts to keep inflation levels in check, despite the impact of external factors such as Russia’s invasion of Ukraine. Borrowers, particularly those with mortgages tied to the bank’s headline interest rate, will likely be the most affected. Meanwhile, the bank does not expect the UK economy to return to pre-pandemic levels soon.
The UK economy and its borrowers are bracing for an interest rate hike as the Bank of England continues to tackle inflationary pressures. However, while the bank has raised its interest rate for the 12th consecutive time, it remains to be seen whether it will be enough to bring inflation levels under control in the coming months.