Bank of England increases base rate to 5.25%
- Bella Edmunds
- 03 August 2023
- 5 mins reading time
On Thursday 3 August 2023, the Bank of England announced that it was raising the base rate by a quarter of a percentage point to 5.25 percent. This was in line with expectations.
This is the Bank of England’s (BoE) fourteenth consecutive rate rise, and it reflects the fact that prices are still rising far faster than is necessary for a stable and growing economy. Although inflation fell last month, to 7.9 percent for the 12 months to the end of June, down from 8.7 percent the month before, and notably lower than the 11.1 percent peak in October of last year, it is still stubbornly high (1).
Inflation headlines concentrate on whether the number has risen or fallen from the month before, but the reality is that prices of everyday goods and services are now eight percent higher than they were just a year ago. That is a big increase in expense for people whose salary is unlikely to have risen by the same amount in one year.
Everything in moderation
Inflation is not all bad – we don’t want zero inflation. This would mean that the economy wouldn’t be able to grow. But we only want moderate inflation – the BoE targets 2 percent, which is enough to keep the economy growing healthily, but low enough so that prices don’t spiral out of control. It’s not just consumers that high prices hurt, businesses also find their profit margins squeezed if their costs (energy, office rent etc.) increase. If their profits are smaller, then they are less able to give their employees pay rises to keep up with the rising prices…and so the vicious cost-of-living circle goes on.
The government also suffers if interest rates go up. The UK government currently has debt of north of £2.5 trillion, and every time interest rates go up, this has a huge impact on the monthly interest repayments that the government has to pay to its bondholders. To highlight how big these interest repayments are, during the 2022-2023 financial year, the government paid £111 billion in debt interest, more than it spent on education (2).
Why does the BoE keep raising rates if inflation is falling?
As noted above, although inflation is falling it is still high and is still four times the BoE’s target of 2 percent. In the announcement today, BoE governor Andrew Bailey said: ‘Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make absolutely sure that it falls all the way back to the 2 percent target. That’s why we’ve raised rates to 5.25 percent today (3).’
The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.
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