Rate Debate: Why the Bank of England Opted for a 5% Hike

Bank interests in England raised to 5% and people are trying to wonder what the reason might be. While many did not see this coming, there were quite a few economists who had expected an increase in the interest rate. But the questions remain, why?

On the 22^nd of June 2023, the BoE’s MPC (Monetary Policy Committee) voted 7-2 in favour of raising the main interest rate from the existing 4.5% to an all time high of 5% interest rate since 2008.

Why was this decision made?

BoE Governor, Andrew Bailey made a statement regarding the increase, stating that the inflation is still too high, and something needs to be done. He further added that if the rates are not increased now, it could take a turn for the worse later.

At the moment, the inflation rate is just under 9% and the BoE’s target is to bring it down to 2%. They have also stated to continue reviewing the state if the economy and make necessary changes every six weeks, and if the inflation remains persistent, the interest rate might need a further increment to reduce the inflation rate.

How the increase in inflation affects individuals

For people who have taken a mortgage or a loan, the cost of repayment will increase, however for those who have a fixed interest rate won’t see any changes until the end of their fixed period.

On the other hand, people with savings in their bank accounts will be delighted to hear that the interest rate on their savings will be going up.

How high is the interest rate expected to peak?

After witnessing the change in interest rate, the current market has seen a nearly 50% chance for the Bank rate to reach up to 6.25% by the end of 2023.

It has also been estimated that the inflation will fall to just over 5% in this year and reach its 2% target in the early months of 2025.

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