Bank of England increases base rate by 0.5% with claims UK may already be in a recession
Bank of England

Bank of England increases base rate by 0.5% with claims UK may already be in a recession

Following Thursday’s Monetary Policy Committee meeting, the Bank of England has increased the base interest rate by 0.5% to 2.25%. While the increase will cause further concern for vast numbers of variable rate borrowers and businesses across the UK, many economists had predicted the central bank would opt for a 0.5% hike, and some had even predicted 0.75%.

The announcement comes as the Bank of England warned that the UK might already be in a recession. Bank officials had previously predicted economic growth in the third quarter of this year but now believe the economy will shrink by 0.1%.

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A 14-year high for interest rates

The bank’s decision to increase the base rate for the seventh consecutive time means it is now at its highest level in 14 years. The last time borrowing costs were at this level was in 2008, during the global financial crisis. This latest hike is part of the central bank’s aggressive strategy to bring down soaring inflation, which has rocketed to its highest level in nearly 40 years.

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It is thought prices will continue to rise in October despite government intervention to cap soaring energy prices for businesses and households. With increased interest rates, consumer spending should decrease, which can help prices cool. However, the latest increase is set to significantly impact mortgage borrowers who are already struggling financially.

While the central bank held off from a 0.75% rate increase, many economists wonder how high rates will go. Bank officials have been clear about their intention to take aggressive action to tackle inflation. Financial markets now predict the UK base rate could come close to 5%. This would be higher than the Eurozone and the United States and reflects the UK’s higher inflation rate.

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Financial markets

The government’s steps to keep energy prices capped at a reduced level means that inflation is likely to peak at a lower level than previously predicted, with most expecting it to peak at 11%.

However, the BBC reports that “…rates are still going up because the Bank sees more inflation arising from the British economy itself, even as the energy shock has been muffled.”

Many homeowners have expressed concerns over how they will manage now that the rate has increased again. One self-employed homeowner explained she had no further cutbacks that she could make to manage the increased repayments on her variable rate mortgage – a situation that many homeowners will now find themselves in. Businesses will also feel the impact of higher borrowing costs as they struggle with soaring energy and fuel prices.

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