The Bank of England has raised interest rates to their highest level since 2008 in the wake of revelations that inflation remained uncomfortably high.
The base rate rise from 4.25% to 4.5% represents the 12th successive increase in the cost of borrowing by the central bank since it started raising rates in December 2021 and follows similar moves by the US Federal Reserve and European Central Bank.
Reaction was swift as it confirmed earlier predictions. In terms of controlling inflation, it was unnecessary, according to a group of independent economists that shadow the Bank’s Monetary Policy Committee.
The Institute of Economic Affairs’ Shadow Monetary Policy Committee believe that the Bank is overfocusing on current inflation and not enough on the sharp reduction in the money supply – which will bring inflation under control within the next two years, as shown by the Bank’s official forecasts.
Alistair Baxter, Head of Receivables Finance at Taulia, said: “Inflation in the UK remains stubbornly high and without clear evidence that it is falling, the BoE will have no choice but to raise rates for the 12th consecutive time.
“But, the latest rise comes with its own risks and could prove to be the last rate rise we see for some time. Recent banking failures have highlighted the impact a higher rate environment has on treasuries held by banks, so the BoE has had to balance out their desire to curb inflation against the stability of the global banking sector.”
Further rate rises will be hard to endure, but we can’t afford to buckle purely for the sake of avoiding another consecutive rise
Joseph Calnan, Corporate FX Dealing Manager at Moneycorp, pointed out that “unless they start looking at other measures” such as quantitative tightening – can they justify an end to hikes in the current context?
He said: “The tough reality is that headline CPI inflation has been over 10 per cent year-on-year for the last seven monthly releases. It’s shown signs of reducing, but nowhere near as quickly as the Bank, the Government and consumers would have hoped – and that’s what we need to be paying attention to.
“UK GDP remains strong, showing that higher interest rates aren’t damaging growth as much as predicted. This has buoyed the pound and supported GBP/USD pushing back to 12-month highs recently. However, a bad result for April or May could tank GBP with no warning.
“Further rate rises will be hard to endure, but we can’t afford to buckle purely for the sake of avoiding another consecutive rise. Ultimately the Bank of England has one job: reduce inflation to the Government’s 2 per cent target. It must focus on doing it.”
A significant proportion of the population doesn’t know or understand what the interest rate and its fluctuations mean for their finances
Trevor Williams, Chair of the independent Shadow Monetary Policy Committee and former chief economist at Lloyds Bank, had predicted shortly before the announcement: “A further interest rate rise would be unnecessary to control inflation and could do serious damage to the UK’s economy. The Bank of England allowed inflation to get out of control by being too slow to raise interest rates. They are now making the opposite mistake.
“The recent bank failures in the US – and SVB UK – are a sign of too rapid a withdrawal of liquidity. Most members of the SMPC believe monetary tightening has gone too far and some of it should be reversed either through resuming Quantitative Easing or lowering the Bank rate. Doing both Quantitative Tightening and raising Bank rate further above 4 per cent is morphing into monetary overkill.”
Junaid Mujaver, Partner of Financial Services at consultancy Newton, felt that “a significant proportion of the population” doesn’t know or understand what the interest rate and its fluctuations mean for their finances.
The hike was hardly news. The UK boasts the fastest wage growth and one of the tightest labour markets within developed markets
He added: “The data shows that this is noticeably high amongst those identified as ‘financially vulnerable’, with almost half (46%) incorrectly believing that higher interest rates either don’t impact the cost of borrowing money or make the cost of borrowing money lower. Financial vulnerability covers anyone who struggles to understand conversations about money and finances, who couldn’t make financial decisions without help, who is not confident with their literacy skills, or who is barely able to make ends meet.
“Financial services providers need to step up and take note, because if vulnerable customers are struggling to understand the cost of borrowing, they are at risk of being mis-sold credit or loans – which can include mortgages, banks, car finance and student finance. With Consumer Duty fast approaching, these providers need to be proactive in ensuring their digital journeys offer full and clear explanations of what a borrowing commitment entails and are adapted to be accessible and understandable for the financially vulnerable so that no one is being under-serviced or overlooked by their provider.”
George Lagarias, Chief Economist at Mazars said: “The hike was hardly news. The UK boasts the fastest wage growth and one of the tightest labour markets within developed markets. This means that inflation is becoming entrenched.
“The Bank of England has little alternative other than tightening the money supply, in order to curb consumer demand. Homeowners who were eagerly waiting for their refinancing rates to drop may be in for a disappointment.
“Unless we see a financial accident that could affect the banking sector, or some sort of other systemic event, we expect the central bank to continue to tighten rates, despite the economic slowdown.”
Michael McGowan, Managing Director, Bibby Foreign Exchange at Bibby Financial Services. described the rate rise as of little surprise – but warns that many businesses will face even higher borrowing and re-financing costs, calling on exporters to consider how best to mitigate the risk of profit erosion by paying close attention to foreign currency needs.
“The knock-on impact of this latest interest rate hike will also strengthen sterling, further compounding the challenges for businesses seeking new markets internationally. One thing exporters would do well to consider is how to best mitigate the risk of profit erosion by paying close attention to their foreign currency needs.”