The Bank of England has recently confirmed that it is increasing the interest rate from 0.5% to 0.75%[1]. The Monetary Policy Committee (MPC) voted for the rise by a majority of 8-1 on 16 March this year. It’s the third interest rate rise in fourth months in a bid to combat rising inflation.
What is the current level of inflation?
Consumer Price Index (CPI) inflation rose to 5.5% in the 12 months to January 2022. In its February report, the MPC had previously warned that inflation could reach 7.25% in April of this year.
However, following Russia’s invasion of Ukraine late last month, it has since reported that inflation could rise to 8% in Q2 and possibly even higher later in the year[1].
How does the interest rate affect inflation?
In theory, increasing the interest rate is supposed to help lower inflation by encouraging saving and slowing down spending and lending. The MPC had stated in its February report[2] (published on 3 February 2022), that it expected CPI inflation to dissipate and decrease to 2% within two years, and to fall below the 2% target within three years.
Yet with the war in Ukraine pushing up oil and commodity prices even further and two more energy price cap rises expected this year, it’s possible that inflation could remain volatile, at least for the near future.
What could it mean for households?
Mortgages
Those on a fixed-rate mortgage are likely to be unaffected until their current deal ends. This equates to approximately 74% of homeowners[3].
Those with tracker mortgages or who are on their lender’s standard variable rate (SVR) will feel the effect now as their monthly repayments rise in response to the increase in the interest rate. Those on a tracker mortgage could experience an increase in their monthly repayments by around £26, while SVR customers could have an extra £16 more to pay each month[3].
Savings
Analysts have warned that there’s no guarantee the higher interest rate will reflect a boost in savings[3]. Currently, as inflation stands, the interest rate may have little benefit to savers who could be losing up to 4.75% in real terms. In other words, money in the bank is losing value as inflation rises and savings account interest rates are not able to combat that fully for now.
Will things get better?
The Bank of England have reported that the reason for a further rise in inflation is down to higher global food prices and wholesale energy costs. But it has also said that it expects inflation to fall back down once prices level off and the impact of inflation starts to take effect. It is committed to reaching the 2% target and so it will be interesting to see what developments take place to achieve this as the year develops.
