The Monetary Policy Committee (MPC) of the esteemed Bank of England has decided to raise the base rate to 4.5%, marking the twelfth consecutive increase. This upward trajectory began in December 2021 when the base rate stood at 0.1%, gradually climbing to its current level. The last time the rate reached 4.5% was back in October 2008.
The Significance of Bank Rate/Interest Rate
The “Bank Rate” holds immense importance as the primary interest rate in the United Kingdom. It is commonly called the “Bank of England base rate” or “the interest rate” in news reports. The impact of the Bank Rate on individuals is contingent on whether they are borrowers or savers.
When interest rates decline, borrowers with loans or mortgages experience a decrease in their interest payments, making their financial obligations more affordable. Conversely, savers witness a reduction in the interest earned on their savings. Lower interest rates make it cheaper for households and businesses to borrow funds, but it diminishes the rewards of saving.
Furthermore, lower rates typically increase the value of assets such as pensions and real estate compared to what they would have been otherwise. You can also read Bank crisis safety for small businesses.
Explanation From the Bank of England
The Bank of England explained the interest rate hike in their recent statement. Check the recent highlights.
They stated, “The Committee’s updated economic activity and inflation projections can be found in the accompanying May Monetary Policy Report. These projections are based on a market-derived trajectory for the Bank Rate, which is anticipated to peak at approximately 4¾% in the fourth quarter of 2023 before concluding the forecast period slightly above 3½%.
“The near-term outlook for global activity has shown positive developments, with projected moderate growth in UK-weighted world GDP throughout the forecast period.
While risks persist, unless another significant shock occurs, the tightening of credit conditions resulting from recent developments in the global banking sector is not expected to impact GDP substantially. Headline inflation has declined in the United States and the euro area, although core inflation indicators remain elevated.”
Projections for the UK’s GDP indicate a stagnant performance in the first half of this year. However, underlying output, excluding the estimated impact of strikes and an additional bank holiday, is anticipated to demonstrate modest growth.
Economic activity has proven to be more resilient than anticipated in February, leading the Committee to believe that the demand path will likely be considerably stronger than previously projected in the February Report, albeit still subdued compared to historical standards.
The improved outlook is attributed to robust global growth, lower energy prices, fiscal support outlined in the Spring Budget, and the possibility of decreased precautionary saving by households due to a tight labor market.”
The Bank of England commented, “Consumer Price Index (CPI) inflation was recorded at 10.2% in the first quarter of 2023, surpassing expectations set during the February and March MPC meetings. This upside surprise primarily stemmed from core goods and food prices. Although inflation remains elevated, nominal wage growth in the private sector and services CPI inflation has aligned with projections.
“CPI inflation is projected to decline sharply from April onwards, primarily due to the elimination of significant price increases observed a year ago during the annual comparison.
Furthermore, the Energy Price Guarantee will be extended in the Spring Budget, and the decline in wholesale energy prices will decrease household energy bill inflation. However, the decline in food price inflation is expected to occur slower than anticipated. Together with developments in other goods prices, this accounts for the Committee’s revised expectation of a more gradual decline in CPI inflation compared to the projections presented in the February Report.”