Why have interest rates gone up?
Updated: May 7
This page was posted 04 November 2022
On 3 November 2022, the Bank of England increased their interest rate (Bank Rate) by 0.75 percentage points. In total, since December last year, they have increased the BOE base rate from 0.1% to 3%.
This interest rate influences all other rates in the UK, including those you might have for a loan, mortgage or savings account. Bank Rate is more widely known as ‘the base rate’ or just ‘the interest rate’. They are raising interest rates because inflation is too high. Raising interest rates is the best and arguably the only tool at their disposal to tackle inflation.
Raising interest rates means many people will face higher borrowing costs. And some businesses will face higher loan rates.
However, the bank of England argue they must act to lower inflation. Low and stable inflation is vital for a healthy economy where people can plan for the future and where hard-earned money keeps its value.
How high will interest rates go?
It is likely the Bank of England will raise interest rates further to assist inflation in coming down. How high Bank Rate will need to go depends on what happens in the economy and what they think will happen to the rate of inflation over the next few years. The future is uncertain, so it is difficult to be precise about how high Bank Rate will go. They will continue to review how the economy is doing and whether a change in interest rates is needed every six weeks or so.
The rate at which rates go up will likely reduce to a halt in the months to come. We have seen such a spike in inflation (which is measured over a 12 month period) that even without any intervention the rate of inflation will come down i.e. if £100 worth of goods were to cost £200 at the end of the year that would be considered an inflation rate of 100%. if it then went up by another £100 in the following year (so from £200 to £300), then that would be an inflation rate of 50%. I don't want to overcomplicate this blog so give me ring if you need further explanation.
In addition, inflation would usually occur due to high salaries in relation to cost of living, cheap borrowing and a general feeling of security/stability. This makes people less frugal and they begin to buy. Lots of buyers will result in competition, thus creating a sellers market. In a sellers market, retailers or anyone with something to sell will cash in by increasing prices, just take a look at the housing market. This time however, inflation has been caused by the cost of fuels. I know of someone who's factory has gone from £84,000 per annum in electricity, to an estimated £276,000. If he wants to keep the doors open where does that cost go? that's right, to the product he is producing, and what do we have? INFLATION!! To get to the real root cause of inflation, energy prices would need to be tackled. We have already seen crude oil, wholesale electricity etc start to stabilise, which should find its way to the consumer along with the inflation figures in the months to come. This will give the BOE less reason to increase rates.
UK Wholesale Electricity Price Chart.
They'll make their next interest rate decision on Thursday 15 December 2022. What's your best guess?