Bank Of England Hikes UK Interest Rates To 1.25%

Interest rates in the United Kingdom have climbed further as the Bank of England works to slow the rate of price rises. Rates have risen from 1 per cent to 1.25 per cent for the fifth time in a row, reaching their highest level in 13 years.

It comes as the rising cost of living, spurred by record fuel and energy costs, is putting a strain on finances. Inflation, or the rate at which prices rise, is currently at a 40-year high of 9 per cent, with the Bank warning that it could exceed 11 per cent later this year.

Rising energy prices, according to the Bank, are projected to drive up living costs even more in October, although it added that if inflationary pressures persist, it will “act aggressively.”

The rate increase means that homeowners with a standard tracker mortgage would have to pay an extra £25 per month. Those with standard variable rate mortgages would see a rise of £16.

Tracker mortgage users are paying roughly £115 more per month than they were before December 2021, when the Bank announced the first in this series of rate hikes, and variable mortgage holders are paying around £73 more.

However, because almost three-quarters of mortgage holders have a fixed-rate arrangement, they are not affected immediately.

Meanwhile, other companies worry that higher borrowing costs may reduce client spending.

“At the moment we’re not seeing it directly but we know we are a luxury,” Julie Dalton, managing director of Gulliver’s Theme Park Resorts told the BBC. “Past experience has told us when interest rates go up we do start to suffer.”

Six of the Bank’s Monetary Policy Committee’s nine members voted to raise rates to 1.25 per cent, but three favoured a larger hike to 1.5 per cent.

According to the minutes of the Bank’s meeting, the UK GDP will contract by 0.3 per cent from April to June.

The Bank did not revise its forecast for the July-September quarter, but it has previously stated that it expects the economy to grow at this time.

If it does, the UK will avoid a recession this year, which is defined as the economy contracting for two consecutive quarters.

However, the Bank has previously stated that it expects the economy to contract in the final three months of this year, when the price cap on home energy bills is scheduled to be raised from £1,971 to around £2,800.

The increase in household gas and electricity bills will push the cost of living up to “just above” 11 per cent in October, according to the Bank.

It indicates that the rate of inflation will be more than five times the Bank’s aim of 2 per cent.

The Bank of England now expects the economy to contract quickly, with a drop in GDP in this quarter, and for inflation to rise much further, exceeding 11% in the autumn when the energy cap is lifted. These new estimates will be fleshed out in August.

The increase in interest rates to their highest level since February 2009 is aimed to prevent the global energy price shock from settling in the UK.

The Bank’s spies in every sector of the economy claim they have not detected any signs of a decrease in labour demand. As a result, the rate may climb to a level that is still deemed low by historical standards, but may be too high for an economy, homeowners, and companies that have grown accustomed to ultra-low rates since the financial crisis.

The Bank has also ceased indicating that more rate hikes are on the way, replacing that language with an assurance that it will respond “forcefully” to any evidence of persistent inflation.

(Adapted from BBC.com)



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