Today the Bank of England voted to raise interest rates by 0.5% to 4%, it’s 10th consecutive rise. The raise is hoped to balance inflation which has been higher than forecast in the November Monetary Policy Report.
The UK chancellor, Jeremy Hunt, pledged to cut spending and borrowing – the decision to raise interest rates should effect the rate of borrowing and help slow inflation.
The bank reported that high energy prices are one of the main reasons for high inflation. Russia’s invasion of Ukraine led to large increases in the price of gas. Higher prices for the goods we buy from abroad have also played a big role. Whilst inflation has begun to fall in part due to lower energy prices, a shortage of workers to fill vacancies is affecting wage growth. This has meant that employers are having to offer higher wages to attract job applicants. As a result, prices for services have risen - which could keep inflation above the Bank of England 2% target.
The Bank of England reported that:
"Both private sector regular pay growth and services CPI inflation have been notably higher than forecast."
Last month the Office for National Statistics said that more than 1.4 million UK households are due to renew their fixed-rate mortgages in 2023. The rise in interest rates will add, on average, and extra £3,000-a-year in interest payments.
"The majority of fixed rate mortgages in the UK (57%) coming up for renewal in 2023 were fixed at interest rates below 2%. Those deals that are due to mature through the course of 2024 will be from two-year fixed rate deals made in 2022 and five-year fixed rate deals made in 2019, when mortgage rates were generally higher than 2%."
The interest rate rise will also affect business paying off loans or seeking new loans.
As inflation grows, households have less to spend. When people spend less on goods and services, prices rise more slowly - this lowers the rate of inflation. However, as a result, growth of the UK economy will slow. The UK economy is forecast to shrink in 2023 and into the first quarter of 2024.
“In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼%"
The Bank of England will next meet to vote on interest rates on 23 March 2023.