By a majority of five to four, the BoE Monetary Policy Committee voted to increase the cost of borrowing on Thursday 03 February from 0.25% to 0.50%. The minority wanted an even larger increase to 0.75% to get a grip on surging inflationary pressure.
Economists widely predicted the move, with the Monetary Policy Committee expected to increase interest rates further in the coming months.
What is the BoE base rate?
The base rate is the is the single most important interest rate in the UK. It determines the interest rate the BoE pays to commercial banks that hold money with them. It influences the interest rates that the banks charge people to borrow money or pay on their savings accounts.
What’s causing the surge in inflation?
The increase in the base rate comes as the chancellor unveiled a support package to help households cope with a 54% jump in energy bills. The majority of inflation is currently being driven by energy prices and those are set internationally. A domestic rate rise will have very limited impact on the rising cost of energy prices for households. The other main driver for inflation is higher food and clothes cost. These have increase due to supply chain issues – shipping containers are in short supply, pushing up prices for those shifting goods around the world.
What does the increase in interest rate mean?
The decision to raise
interest rates will make borrowing more expensive, potentially hitting some
households harder. Conversely, the level of interest payable to consumers
should increase, although this is generally a very small rise, with the best
deals reserved for longer-term fixed rate accounts.
The BoE cannot do much to
ease the energy price shock or surging price rises in some consumer goods, so
it is sticking to its job by trying to keep inflation stable.