Bank of England Raises Interest Rates

The Bank of England on Thursday, August 3, announced an increase in interest rates.

Bank of England Raises Interest Rates

This increase was a quarter of a percentage point. As a result of the decision of the financial regulator, the main cost of borrowing for commercial banks in the UK reached 5.25%. This level is the highest since February 2008.

This increase is the fourteenth in a row since the implementation of the relevant policy by the Bank of England. The strategy of consistent growth of interest rates as a process that demonstrates a kind of continuity and systematicity as of today began in December 2021

Six members of the monetary policy committee voted for a quarter-point increase, two supported a half-point increase and another suggested a pause in the relevant actions of the bank

The financial regulator issued a statement claiming that the latest data was ambiguous. The Bank of England notes that some of the main indicators, for example, wage growth, indicate that certain risks associated with sustained inflationary pressure have most likely begun to manifest themselves.

The increase in interest rates for more than 2 million Britons who own mortgages is unpleasant news. These citizens have already had to deal with a sharp increase in their monthly loan bills.

Data from the financial products comparison site Moneyfacts shows that the average fixed rate of a two-year mortgage on Thursday was 6.85% compared to 3.95% in August 2022.

Financial markets predicted that the Bank of England’s base interest rate would reach a maximum of 5.75% by the end of 2023, justifying this forecast by the lender’s efforts to curb price growth.

Kallum Pickering, senior economist at Berenberg Bank, said it was highly likely that less than half of the previous rate hikes affected the real economy. In his opinion, the UK waits to tighten its financial policy for many more months, which will continue even after the end of the practice of raising rates.

Inflation in the United Kingdom remains at a high level, although a downward trend in this indicator has been recorded over the past few months. In June, consumer price inflation was 7.9%. In October last year, a 41-year high of this indicator was recorded at 11%. Despite the improvement in the situation, the Bank of England’s 2% target rate still remains a goal located at a considerable distance from the real state of affairs.

Core inflation, which excludes volatile food and energy prices, fell to 6.9% in June from 7.1% in May. This figure is the highest in the last 31 years.

At a press conference, the head of the Bank of England, Andrew Bailey, said that the subsequent dynamics of inflation in the United Kingdom will largely be determined by the state of affairs in the labor market and the movement of wages.

Chancellor of the Exchequer Jeremy Hunt predicts that in a year’s time, inflation will be less than 3%. At the same time, he acknowledged that in the near future, British families will have to face an increase in mortgage bills.

Labour and Liberal Democrats said that an increase in interest rates would have a negative impact on the financial well-being of low-income citizens. They also blamed the UK government for the crisis.

During the press conference, journalists asked Andrew Bailey whether the decision of the Bank of England is a signal that the population still has to go through some pain. The head of the financial regulator said that it is not necessary to use such formulations, but acknowledged the impact of inflation on the welfare of society, especially the least material secure groups. He also noted that the lack of a fight against inflation will provoke an even more difficult situation.

Andrew Bailey said that the inflation dynamic shows a more confident decline compared to previous estimates of the Bank of England. He also noted that the British economy turned out to be more stable than expected. According to him, the historically low unemployment rate is an additional reason for optimistic sentiments.

Separately, Andrew Bailey recalled that in November last year, the Bank of England predicted a small recession, but this did not happen.

As we have reported earlier, BIS and Bank of England Complete CBDC Project.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.