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Bank of England increases interest rates to 3.5% despite inflation falling | Personal Finance | Finance

Earlier today, the central bank’s Monetary Policy Committee (MPC) met to discuss the fate of the base rate, which is the amount the financial institution charges banks and lenders when borrowing money. Ultimately, the Bank of England opted to raise interest rates once again by 50 basis points which means the base rate is now at 3.5 percent. While this decision is a boon for those with savings accounts, people with mortgages and debt payments are likely to be detrimentally affected in the short term.

This represents the ninth consecutive rise to the base rate as the central bank attempts to rein in the UK’s skyrocketing inflation rate.

Yesterday, it was shared the Consumer Price Index (CPI) rate of inflation to November 2022 came to 10.7 percent in a sign of it slowing down amid the rise in the cost of living.

While this was less than the 41-year high of 11.1 percent recorded for the previous year, this still represents a huge financial burden for consumers as the price of goods and services continue to remain sky-high.

During the MPC’s meeting, the decision to increase the base rate was voted by a majority of six to three.

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The trio explained: “When the Bank of England hiked by 75 basis points for the first time back in November, it seemed obvious that it would be a one-off move. 

“The clear signal was that markets were – at the time – overestimating the scope for future tightening.

“The forecasts released back then suggested that keeping rates at three percent would see inflation overshoot just in two years, while raising them to five percent would see an undershoot.

“In other words, we should expect something somewhere in the middle, and that’s why we think the bank rate is likely to peak at four percent early next year.”


Alice Haine, a personal finance analyst at Bestinvest, referred to the Bank of England’s decision as a “blow for struggling households” but highlighted that the smaller rate rise from last month should give people a “glimmer of hope”.

The finance expert said: “Increasing interest rates when the economy is on the brink of a recession might not be typical behaviour for a central bank, but the Bank of England is intent on taming double-digit inflation and bringing it closer to its target of two percent.

“Higher interest rates will certainly add more pressure on household finances, particularly for borrowers whose finances have already been hammered by the toxic mix of rising prices, falling real incomes, soaring borrowing costs and tax rises next April.

“But interest rates are widely expected to peak at about 4.5 percent next year – with rates potentially falling from there as the lender looks to support the economy through the recession.”

In its assessment, the Bank of England’s MPC determined more base rate increases may be necessary should the economy change in line with the November Monetary Policy Report forecasts. This will be done to return the rate of inflation to two percent, which is the central bank’s primary target and incentive for raising interest rates.

Joe Nellis, a professor of global economy at Cranfield School of Management, emphasised hiking rates in this way may be the “only option” available in attempting to address the cost of living crisis.

Professor Nellis said: “Today’s Bank of England base rate increase will fuel the fire for public sector wage increases. A rise in the cost of borrowing is an unwelcome Christmas present for millions.

“Interest rate rises should eventually push inflation pressures down, but there is a time lag. Meanwhile, the cost of living crisis continues to make it harder for millions of households to make ends meet. The medicine from the Bank of England tastes bitter, but it’s the only available option right now.”

The next intervention from the Bank of England when it comes to the base rate will take place on February 2, 2023.

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