Bank of England raises rates by half a percent, to 5 percent

  • Azad Zangana, Senior European Economist and Strategist at Schroder Investment Management
  • 22 June 2023
  • 5 mins reading time

The Bank of England (BoE) has today raised interest rates by half a percentage point, to 5.0 percent. Markets expected a rise of just one quarter of a percentage point. This is the 13th consecutive interest rate rise for the UK and take rates to their highest level since September 2008.

Today’s rise follows stronger than expected employment and inflation figures, further casting doubt about the effectiveness of using interest rates as a tool to manage the economy.

Data suggests inflation will stay high

At Schroder Investment Management (SIM), we believe two sets of data have unnerved the BoE. The first, published on 13 June, showed a fall in the headline unemployment rate, to 3.8 percent, with a rise in annual wage growth (excluding bonuses) to 7.2 percent. This suggests there could be further inflationary pressures, as wage rises can help drive up inflation.

The second set of data to concern the BoE was the inflation data published on 21 June, which showed annual inflation at a higher-than-expected 8.7 percent. High inflation results from rises in the prices in goods and services. And it is something central banks and governments wish to avoid, because it means we can buy less with our money.

Why are interest rates not working?

BoE data shows that the share of households in England with outstanding mortgages has fallen in the past decade from 32 percent to 26 percent, reflecting the UK’s ageing population. Moreover, the share of households with fixed-rate mortgages has risen substantially since 2012, while the share of households with variable rate mortgages has fallen significantly in the same period. This means that interest rate rises will only impact the mortgages of around 9.7 percent of households before the end of 2024.

At SIM, we believe these developments mean households are less affected by rising interest rates than previously. In our view this has contributed to higher UK inflation, as it leaves households with more to spend on goods and services, which helps drive up prices. We also believe Brexit effects have made the UK more inflation prone, through their impact on imports and the more limited ability of companies to source the staff they need.

Despite the more limited effectiveness of interest rate rises, we believe the BoE may have to continue to raise interest rates in an effort to dampen economic growth and bring down inflation.

This is an edited version of an article first published on the SIM website on 22 June 2023.

Important information

Schroder Investment Management (SIM) provides investment management and advice services for Schroders Personal Wealth (SPW) funds and portfolios respectively.

Forecasts are not a reliable factor of future performance.

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

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