The Bank of England’s Monetary Policy Committee (MPC) has voted to increase the Bank Rate from its historic low of 0.1% to 0.25%. The rise comes as it was reported that inflation has reached a record new 10-year high in the 12 months to November of 5.1%.
The decision was announced on the MPC’s website on 16th December following a meeting on the 15th December, which saw a vote in favour of the increase take place at 8-1.
Interest rates have been at an all-time low of 0.1% since March 2020, in an effort to mitigate slow growth in the economy in the wake of the pandemic.
This is the first time that the Bank Rate has risen in three years and it comes despite fears the Omicron variant could slow down economic growth by causing people to spend less.
What is the Bank Rate?
The Bank Rate is sometimes called ‘the Bank of England base rate’ or ‘the interest rate’. It’s the most important interest rate in the country. It influences inflation and determines the interest rate for commercial banks.
If the Bank Rate rises, it is intended to incentivise people to save, therefore encouraging less spending in the economy and driving the price of goods down. If it decreases, it’s intended to incentivise spending, therefore encouraging growth of the economy.
Why is inflation so high?
An increase in the price of wholesale gas has been largely responsible for the rise in inflation, pushing up domestic energy prices. Global demand for goods and supply chain issues have also been a factor, as well as waves of Covid-19 causing less impact on economic growth than predicted.
What is the effect of the Bank Rate increase?
Savers can expect to get a small boost to their savings interest, although returns will not be high enough to meet inflation.
Those on a typical tracker mortgage or a standard variable rate could expect a small rise in their monthly payments, potentially increasing by between £10-15.
Loans on variable rates may also increase along with the rise in interest rates.
What will happen this year?
Of the increase, Our Chairman, Brian Morman, said:
The Bank of England have decided to increase interest rates to 0.25%. This has not been unexpected as inflation and consumer price index rates have been increasing rapidly. Interest rates still remain the main way of controlling inflation.
We can expect further increases as we move through the New Year but significant increases are not expected; it’s thought inflation rates at the moment will be transitory and reduce from the middle to the end of next year.”