The Bank of England has raised interest rates to their highest level since 2008, with the base rate now sitting at 4.5 per cent.
The central bank’s monetary policy committee voted 7-2 today (May 11) to raise the base rate of interest by a quarter of a percentage point, taking it to 4.5 per cent.
The two dissenting members voted to maintain the rate at 4.25 per cent.
The MPC predicted that the base rate of interest would rise again to 4.75 per cent in the third quarter of the year, saying although risks remain, “absent a further shock”, there is likely to be a small impact on GDP as a result of previous rate rises.
The MPC also said inflation will drop to just above 1 per cent on a two and three-year horizon.
Inflation eased slightly in March to 10.1 per cent, higher than the 9.2 per cent the BoE had forecast.
Inflation peaked at 11.1 per cent in October last year, but it still remains significantly higher than the central bank’s 2 per cent target.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: “The BoE has been winding up interest rates since December 2021, approving 12 consecutive increases to the base rate which has upped borrowing costs and brought the golden era of low mortgage rates to an end – but there has also been a reprieve in savings rates.
“Not long ago, there was a belief among many economists that the interest rate hike cycle was coming to an end, but the persistence of double-digit inflation has flipped the script. Inflation is proving to be too hot and sticky, which means that interest rates may now peak at a level that exceeds initial forecasts.
“The double whammy of high inflation and high borrowing costs looks set to continue battering household budgets."
In March, Andrew Bailey, governor of the BoE, said the recent strains in the banking system will not stop the MPC from raising rates if inflation continues to stay high.
Concern has been growing that a number of banking failures, including the collapse of Silicon Valley Bank, and resulting “shotgun marriage” of UBS and Credit Suisse, were due to the speed of rate rises in the US.
However, in March, the BoE's financial policy committee, which has briefed the MPC, said the UK banking system maintains robust capital and strong liquidity positions.
sally.hickey@ft.com
