Base rate rises to 1% as Bank expects inflation to top 10%

The Bank of England raised the base rate to 1% as expected – its highest level in more than a decade. He also predicts that inflation will exceed 10% by the end of this year.

Members of the Monetary Policy Committee (MPC) voted by a 6-3 majority to raise the base rate from 0.75% to 1%. Members of the minority wanted to increase the bank rate from 0.5% to 1.25%.

The rate hike was widely predicted and comes as the Bank aims to rein in soaring inflation amid the ongoing pandemic, cost of living crisis and global effects of the war between the Ukraine and Russia.

This brings the discount rate to its highest level since February 2009. In January 2009, the rate was 1.5% before falling back to 1% in February and then to 0.5% in March 2009.

Raising base rates is one of the mechanisms used by the Bank of England to try to control inflation (7% in March 2022), as higher borrowing costs generally mean people are spending less.

It is now the fourth increase from the historically low rate of 0.1% in December 2021. It rose to 0.25% before climbing to 0.5% in February and then to 0.75% in March 2022.

But the base rate could rise further. In March, revised forecasts suggested that it could reach 2% by the end of the year. But last week Chancellor Rishi Sunak told the cabinet that interest rates could rise to 2.5% over the next 12 months, adding that financial markets had already priced in the rise.

And following the last MPC meeting, he also predicts the rate will peak at 2.6% in 2023 before falling back to 2% in three years.

However, leading economic consultancy Capital Economics revised its forecast and said with inflation staying higher for longer and the labor market remaining tight until 2023, it suggested the Bank would raise the base rate to 3% next year.

Indeed, inflation is expected to rise to around 8% in the second quarter of 2022 (four times the 2% target) and “perhaps even higher later this year”, according to the economic consensus.

But the MPC now expects inflation to continue to rise for the rest of the year, reaching just over 9% in the second quarter of 2022, and averaging just over 10% at its peak in fourth quarter of 2022.

The minutes of the meeting read: “Most of this further increase reflects the rise in household energy prices following the large increase in the Ofgem price cap in April and the additional large increase expected in October The price cap mechanism means that it takes time for increases in wholesale gas and electricity prices, and their respective forward curves, to pass through to retail electricity prices. Given how the price cap works, consumer price inflation is likely to peak later in the UK than in many other economies, and may therefore fall back later. the CPI also reflects rising prices for food, basic goods and services.

On GDP, the Bank said growth is expected to slow sharply, reflecting the impact of sharp rises in global energy and tradable goods prices on the real incomes of most UK households.

While the jobless rate is expected to decline slightly further in the near term, it is expected to hit 5.5% in three years given the marked slowdown in demand growth, the MPC said. It fell to 3.8% in the three months to February 2022.

What the base rate hike means for you

Mortgage borrowers

If you are on a fixed rate mortgage, there will be no changes until you reach the end of your agreement. But if you’re one of the two million variable rate borrowers, you can expect the hike to trickle down fairly quickly. Those who repay will also see higher rates pass through.

Savings rate

Lenders are quick to pass on mortgage rate hikes, but when it comes to savings, providers aren’t quick to pass on the benefits.

In theory, a base rate increase is good news for savers, but not all providers will pass on the full 0.25% rate increase.

Research by data site Moneyfacts this week found that despite three base rate hikes already this year, 83% of easy access accounts were paying less than the Bank’s previous base rate of 0.75%. England (based on sum of £10,000).

Moreover, with inflation at its highest level in 30 years, and with an 8% overshoot expected soon, it will become more difficult for savers to match or beat inflation, so money loses its value in real terms.

Loan and credit card borrowers

A higher base rate is also likely to impact interest rates on loans and credit cards, making it more expensive to borrow money or pay down debt.

However, for those with a fixed rate personal loan, there is no change as it is fixed for the term of the loan.

Additionally, it may become more difficult to be accepted for a loan as banks may become stricter on affordability, particularly regarding a borrower’s ability to continue making higher repayments.

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