The Monetary Policy Committee (MPC) of the Bank of England stated on December 15 that it has increased bank rate (interest rate) to 3.5%, up 0.5 percentage points. Bank of England interest rate will be 5.2% in the fourth quarter of 2023
The bank rate is now higher than it has been in 14 years. Borrowers will feel the effects of a rate increase through higher mortgage and loan fees, while savers across the UK will benefit from improved returns. The Bank raised its benchmark rate to 3% at its meeting in November, marking the largest single hike since 1989.
On February 2, 2023, the Bank of England will release its next bank rate.
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What is the bank rate (interest rate) and who set it?
Bank Rate is determined by the Monetary Policy Committee( MPC) of the Bank of England. In order to achieve the government’s goal of maintaining low and constant inflation, actions are taken by MPC as part of the monetary policy.
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The UK’s Bank Rate is the most significant interest rate of the country. It is sometimes referred to in the media as the “Bank of England base rate” or even just “the interest rate.”
The UK’s central bank is known as the Bank of England (BoE). After Sweden’s Sveriges Riksbank, it is the second-oldest central bank in the world, having been founded in 1694. King William and Queen Mary issued a royal charter to the BoE in 1694, establishing it as a private bank to the government.
Why Bank of England continuously increase the Bank rate?
When the Bank of England’s policymakers meet today, they are likely to decide to raise borrowing costs for individuals and companies as worries about the UK economy entering a prolonged recession grow.
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In order to battle inflation, the monetary policy committee expects to raise the base rate of the central bank by 0.5 percentage points, to 3.5%. Inflation, according to the chancellor, is “the No. 1 enemy that makes everyone poorer,” and “putting inflation down so people’s earnings go further is my top objective,” he stated.
According to data issued, the consumer prices index (CPI) decreased from 11.1% in October to 10.7% last month, primarily due to slower price growth in gasoline, apparel, and food, although it still remained much above than the BoE’s 2% target.
Investment director at AJ Bell, Russ Mould, stated: “Raising rates increases the cost of borrowing money for individuals and businesses and, ideally, results in a decrease in spending and investment, which should help to ease the economy and bring down prices. Since it takes time for this to transmit across the system, central banks will keep raising interest rates until there is sufficient data to warrant a change in strategy.
Are interest rates of other major economies increasing?
The UK is impacted by global pricing increases. Therefore, the effectiveness of UK interest rate increases has a limit.
However, other nations are adopting a similar strategy and have started increasing interest rates as well.
Large rate increases announced by the US central bank have brought the main rate to levels not seen in nearly 15 years.
As inflation continues to be a problem in many major economies, other central banks throughout the world have also increased interest rates.
United States (Federal Reserve)
At its policy meeting that ended on December 14, the Fed increased interest rates by 0.5 percentage points, bringing them to a range of 4.25–4.50%. The increase was lower than the increases of 0.75 percentage points observed in the four prior policy meetings. Rates are anticipated to increase further as long as inflation is substantially above its target of 2%. The Federal Reserve is removing $95 billion worth of assets from its Quantitative Easing program each month.
Eurozone (European Central Bank)
The ECB increased its benchmark interest rates by 0.5 percentage points at its meeting on December 15. The deposit rate increased to 2.0% as a result. With inflation far higher than its 2% target, the ECB began hiking interest rates in July 2022, and additional rises are inevitable. The ECB also declared that it would begin winding down its quantitative easing programs in March 2023 by giving up the monthly reinvestment of €15 billion in maturing assets held in one of its two primary QE programs.
How will be the future UK interest rate?
The Bank of England (BoE) predicted that the bank rate in the UK might reach 5.2% in the fourth quarter of 2023 before dipping to 4.7% in 2024 and 4.4% in 2025.
From the fourth quarter of 2022 through the third quarter of 2023, the BoE was predicted by ING to maintain its key rate at 3.75%. In the fourth quarter of 2023 and the first quarter of 2024, the BoE was expected to lower interest rates to 3.50% and 3.00%, respectively, according to ING. The bank predicted that the BoE would keep decreasing interest rates, bringing the bank rate down to 2.25% in the fourth quarter of 2024.
According to ABN-Amro, the policy rate will peak at 3.5% in the first quarter of 2023. Bill Diviney, the bank’s chief economist, predicted that the UK’s benchmark interest rate will increase to 4.25% in 2023 and drop to 3.25% in 2024.