Bank of England increases interest rates by 0.5% to 4%.

The Bank of England’s Monetary Policy Committee has voted 7-2 to increase Bank Rate by 0.5% to 4%.

This is despite inflation slowing for a second consecutive month

following the peak of 11.1% in October.

Interest rates are now at their highest level since the 2008 financial crisis following 10 straight increases since December 2021.

Two members voted to maintain Bank Rate at 3.5%.

In its meeting, the Bank’s Monetary Policy Committee (MPC) said that global inflation remains high, although admitted that “it is likely to have peaked across many advanced economies, including in the United Kingdom”.

Many central banks have continued to tighten monetary policy, although market pricing indicates reductions in policy rates further ahead.

Given the lags in monetary policy transmission, the Committee believes the increases in Bank Rate since December 2021 are expected to have an increasing impact on the economy in the coming quarters.

The MPC’s updated projections show CPI inflation falling back sharply from its current elevated level of 10.5% in December, in large part owing to past increases in energy and other goods prices falling out of the calculation of the annual rate. Annual CPI inflation is expected to fall to around 4% towards the end of this year.

In the Bank’s latest forecast, Bank Rate rises to around 4.5% in mid-2023 and falls back to just over 3.25% in three years’ time.


In its minutes, the MPC said: “The extent to which domestic inflationary pressures ease will depend on the evolution of the economy, including the impact of the significant increases in Bank Rate so far. There are considerable uncertainties around the outlook. The MPC will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

Paul Wilson, chief investment officer at Channel Capital, commented: “A decade of record-low interest rates was not economically healthy or sustainable. But moving from all-time lows to a 15-year high of 4% in the space of 14 months has inevitably created challenges for lenders and borrowers alike.

“For lenders, it has hindered their efforts to secure senior debt from banks and institutions, many of which are reticent to deploy capital in the current climate of changing rates. The shortage in senior debt – which is essential, given it makes up the majority of a lenders’ funding stack – is, in turn, preventing or limiting lenders from issuing loans to clients. It becomes a vicious circle.

“At times like these, other sources of capital become more important. Mezzanine finance is a prime example, and we’re seeing more lenders look to this option when building their funding stack. By securing mezzanine finance from more nimble, ambitious, or proactive investors, lenders are then able to provide much-needed confidence to the senior debt providers. As such, more must be done to champion the role of mezzanine finance in the current climate; it is keeping the lending industry active and is likely to remain in high demand over the months and years to come.”

Brian Murphy, head of lending at Mortgage Advice Bureau, said: “The end could be in sight, but not yet in touching distance. The decision today is of course expected, but not welcomed, as the Bank of England has chosen to continue their war on inflation with more rate rises, pushing the base rate to a 15-year high. This will inevitably leave many homeowners feeling stuck and worried by the prospect of their mortgage costs getting even higher.

“However, there could be a glimmer of hope on the horizon, with forecasts predicting a fall in rates later this year. We urge anyone who is concerned about their ability to pay their mortgage or to afford a new mortgage to speak to an adviser, who can help you navigate what may feel like an overwhelming situation. As rising bills continue to squeeze household budgets, it would be good practice to shop around for the best deals – including considering the switch to a tracker mortgage. It’s hard to feel positive at the moment, but all predictions suggest we are close to reaching the peak of the hikes – and all eyes will be on the next decision to determine whether interest rates have any further distance to climb.”

Garry White, chief investment commentator at Charles Stanley, commented: “The Bank of England has an arguably more difficult job than the European Central Bank or the Federal Reserve. Inflation remains high at 9.2% and components such as services show no signs of slowing, while the labour market remains very tight. However, we may see some shedding of Christmas holiday service workers in the next few months, which would be helpful for Bank of England policymakers. The UK’s economic outlook is one of the worst in the developed world, with the IMF recently forecasting that the UK economy will contract by 0.6% this year, reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.

“The central bank’s Monetary Policy Committee (MPC) must navigate high inflation and a tight labour market, alongside poor economic growth forecasts. This carries many risks – and a deep recession could be harder to avoid in the UK than elsewhere. That’s probably why two members of the MPC vote to keep rates at 3.5% with no increase. Thankfully, inflation is likely to have peaked and, with rates likely to travel further into restrictive territory, inflation should begin to fall towards the 2% target over the next year and beyond. However, we see this as a target that is difficult to hit – and relatively high inflation will still be a feature through 2023.”

Kevin Brown, savings specialist at Scottish Friendly, added: “The MPC’s decision today gives us little in the way of real surprises and meets expectations from the market.

“The big question is where we go from here. Inflation in the UK is looking particularly sticky compared to international peers. Interest rates have risen like a rocket in a matter of months and may fall like a feather as inflation lingers on in 2023.

“This is compounded by high core inflation, particularly problematic for households, and which leads to the possibility that rates will stay higher for longer. With a cost-of-living crisis forcing households to become more dependent on credit for everyday spending, this will only compound the issue.

“As ever, banks and building societies are likely to raise borrowing costs quicker than the interest rates offered on savings, so the negatives of today’s decision will outweigh the positives. Nonetheless, savers and borrowers should both shop around and plan decisions in advance to get the best rates possible.

“The convergence between inflation and interest rates bodes well for savers, but possibly the best way to protect their money from losing value as price rises remain high is to consider investing for the long term, whenever possible.”

Rozi Jones (Financial Reporter)

Retirement ProfessionalsBank of England increases interest rates by 0.5% to 4%.