Bank of England raises its interest rate by 0.75 per cent to 3 per cent

  • Azad Zangana and Richard Allan
  • 08 November 2022
  • 5 mins reading time

On 3 November, the Bank of England (BoE) increased its interest rate by 0.75 percentage points to 3 per cent, as it tightened monetary policy in an attempt to bring down inflation. This is the UK central bank’s highest base rate since 2008 and the largest interest rate rise since 1989.

The BoE described UK financial conditions as ‘challenging’ as households and businesses struggle with high inflation. Indeed inflation, as measured by the Consumer Prices Index (CPI), stood at 10.1 per cent in September. The Bank’s governor Andrew Bailey said UK economic growth was weaker than expected. Even so, recent labour market statistics show there are more unfilled job vacancies in the UK than unemployed people actively seeing work. But this is contributing to rising wage growth, which in turn can contribute to increased CPI inflation.

Commenting on the situation in the mortgage market, Bailey said much of the recent rise in mortgage rates was in reaction to the political turbulence in Westminster. He said these interest rates were now coming back down, so conditions for fixed rate mortgages should improve. However the three-quarters of a percentage point interest rate rise will increase the cost of borrowing for people with mortgages on variable interest rates.

Implications for your finances

In financial planning terms, when interest rates go up, then mortgage interest rates can go up and your savings rates can go up. How you should respond to this depends on your circumstances.

If you have a variable mortgage rate and are now facing higher mortgage repayments then you could potentially benefit from using surplus cash to pay off some of the borrowing. But people’s circumstances are unique so there is no single best response here.

On the flipside, savers can look forward to interest rates that are higher than those they probably would have got 12 months ago. But, even on 12-month fixed-term deposits, which typically pay higher interest rates than current accounts, the real value of the cash would be eroded by higher inflation. So savers could potentially benefit from investing in the stock market rather than cash, if this is appropriate for their circumstances.

If you are unsure how the 75 basis points interest rate rise, high CPI inflation and the increased cost of living could affect your finances, then you may benefit from speaking to a financial adviser.

More rises in interest rates expected

Inflation from July to September was in line with the central bank’s expectations. But Bailey suggested further interest rate rises were likely in order to return CPI inflation to its 2 per cent target.

Looking ahead, we expect further monetary tightening through rises in interest rates in the near-term, though the pace of base rate rises may ease next year. Our forecast is for the Bank Rate to peak at 4 to 5 per cent, but it may undershoot our estimate.

At Schroders Personal Wealth (SPW), we recommend not keeping all your investment eggs in one basket. As such we believe in the benefits of diversifying your investments geographically. For example our medium-risk SPW Balanced Portfolio Fund has just 28.3 per cent holdings in UK assets. This means the UK is a relatively small part of our overall investments and so we have limited investment exposure to UK financial markets.

Azad Zangana is Senior European Economist and Strategist at Schroders. Richard Allan is Financial Planning Director at Schroders Personal Wealth.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors 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.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.

Mortgages and current and savings accounts are not offered by Schroders Personal Wealth. These can be complex areas and we recommend that you weigh up all the positives and negatives, and take professional advice before committing to a course of action.

All information correct at the time of publishing.

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