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Bank of England Raises Interest Rates to 5.25% Amid Soaring Prices and Easing Inflation

Published by Chirag
Published Date: August 3, 2023

In a bid to tackle soaring prices and inflation, the Bank of England has raised its interest rates to 5.25%. This marks a 0.25% increase from the previous rate of 5% and represents the 14th consecutive hike. The last time interest rates reached this level was in April 2008. The move comes as a response to the ongoing challenge of controlling inflation, which hit 7.9% in June, almost four times higher than the Bank's 2% target. While rising interest rates may have both positive and negative implications, they are aimed at curbing inflationary pressures.

interest rates rise to 5.25%

Image source: Bank of England

Impact on Mortgage Holders and Borrowers

The rate hike will directly affect mortgage holders with variable or tracker mortgages, as well as those seeking new fixed-rate deals. With the increase in interest rates, monthly mortgage payments for these homeowners will rise, potentially putting additional financial strain on their budgets. Additionally, lending conditions are expected to tighten, making it difficult for first-time home buyers to enter the property market.

Impact on Savers and Retirement Planning

While rising interest rates pose challenges for borrowers, they present an opportunity for savers. People with savings are likely to benefit from higher interest rates, receiving better returns on their money. This could be particularly advantageous for those on the cusp of retirement, as they might secure better annuity rates, providing a higher guaranteed income when converting their pension pot.

interest rates rise to 5.25%

Impact on Government and National Debt

The increase in interest rates will also have implications for the government. As the interest on the country's debt rises, the cost of servicing that debt increases, leading to potentially reduced funding for public services such as schools and hospitals. Higher interest payments put a strain on the government's budget and may require adjustments to expenditure in various sectors.

Inflation and Economic Outlook

The latest data indicates that inflation has eased slightly, reaching its lowest level in over a year but still standing at 7.9%. The Bank of England predicts that the Consumer Prices Index (CPI) inflation will decline to 4.9% by the final quarter of the year but will remain above the 2% target until mid-2025. Bank of England Governor Andrew Bailey emphasised the importance of reducing inflation to alleviate the burden on the most vulnerable and ensure it returns to the 2% target.

interest rates rise to 5.25%

Government's Response

Chancellor Jeremy Hunt responded to the rate increase, assuring the public that sticking to the economic plan should bring inflation below 3% within a year without falling into a recession. Prime Minister Rishi Sunak pledged in January - when inflation was at 10.1% - to halve price growth by the end of the year.

Following June’s reading, there is still some way to go. Acknowledging the challenges faced by households dealing with higher mortgage bills, the government pledged to continue supporting families during these economic adjustments. 

Monetary Policy Committee Decision

The decision to raise interest rates to 5.25% was made by a majority vote of the nine-member Monetary Policy Committee. Six members supported the 0.25 percentage point increase, while one member favored keeping the rate at 5%. Two members were in favor of a more substantial increase, voting to raise it to 5.5%.

interest rates rise to 5.25%


The Bank of England's decision to increase interest rates to 5.25% aims to combat surging inflation and stabilise the economy. While mortgage holders and borrowers may face challenges with higher monthly payments and tighter lending conditions, savers and those nearing retirement could benefit from improved returns on their savings and better annuity rates. The government, on the other hand, will have to grapple with increased interest payments on the country's debt, potentially affecting funding for public services. As the economy moves forward, all eyes will be on inflation figures and the effectiveness of this rate hike in curbing price rises.

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