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What does the next Bank of England base rate rise mean for you?

The Bank of England’s Monetary Policy have voted in a majority to raise the base rate to 4.25% – the highest level in 14 years.

The decision to rise rates by 0.25 percentage points has been taken to try and combat inflation which is currently at 10.4% – over five times the MPC’s target and a 40 year high.

Interest rate rises tend to curb inflation by controlling consumer spending as a result of making it more expensive to borrow.

However with the recent banking turmoil as a result of the collapse of SVB and the problems at Credit Suisse, there are even more economic issues to be considered by those in power.

Despite the challenges faced with banks struggling with liquidity, Bank of England governor Andrew Bailey said “We were really a bit on a knife edge as to whether there would be a recession… but I’m a bit more optimistic now,” showing some hope for the future.

Although there is light at the end of the tunnel, many will be focused on the impact in the here and now with relation to how the further rise in bills will impact upon the current cost of living crisis.

As many of you are aware, the base rate is intrinsically linked to the interest rates of consumer borrowing most notably mortgages. The average tracker mortgage is going to rise by £24 per month and other loans are also likely to see their rates hiked.

Of course interest rates are a double-edged sword and savings rates will also rise however this will be at a slower rate than the change in borrowing as banks are obviously focused on making money.

The further rise in rates will put more pressure on businesses across the country (including the banks) who have increased their borrowing to get through a tough through years – I think a few more companies will be pushed to the brink in the coming months.

Inflation also seems to be falling (although very slowly) which also means that prospects for the economy are slightly brighter even if they’ve been marred by some banking issues and the fears of what could be.

Do comment your thoughts below.

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4 responses to “What does the next Bank of England base rate rise mean for you?”

  1. David Sperry aka BigHemi Avatar
    David Sperry aka BigHemi

    Gabriella, it seems that that the UK and the US are in same inflationary pattern and are using the same technique to combat it. Here, inflation peaked in late 2022, and while tapering off, has remained high. The Bank of England and the Federal Reserve Board (the Fed) have been raising the base rate bit by bit for almost two years now.

    I’m a Mechanical Engineer by profession, not an Economist, so I don’t fully understand how higher interest rates reduce inflation. To me, it’s counter intuitive. If you can explain it in a few words, be my guest.

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  2. David Sperry aka BigHemi Avatar
    David Sperry aka BigHemi

    Gabriella, I would love to understand how higher interest rates can lower inflation. While there may be a correlation, the stock markets dislike higher rates and here in the US are taking a pounding.

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    1. Gabriella B Avatar
      Gabriella B

      Sorry for the delay to replying – I’ve been a bit busy.

      Raising interest rates increases the cost of borrowing and encourages people to save. This reduces the amount of consumer spending and therefore demand for products. Lower demand leads to a slight surplus and therefore slightly lower (or the same prices) reducing inflation.

      This is massively oversimplified but you get the idea.

      The stock markets are not doing very well because of the issues with Credit Suisse and SVB. There is still a lack of faith in the banking sector and an interest rise has increased the pressure on banks so people are still sceptical.

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      1. David Sperry aka BigHemi Avatar
        David Sperry aka BigHemi

        Gabriella, you have done a wonderful job explaining the relationship between interest rates and inflation. It’s so concise and understandable. Thank you.

        You can see I’m not as busy as you are. With the demise of Race Director I have more time on my hands. I had more fun on RD with our small community than I would have on a big site with lots of members and features. I haven’t signed up for any new sites yet, and don’t know if I will.

        I enjoy your posts so I’ll keep commenting. Do you belong to any other platforms that resemble DriveTribe or Race Director?

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