Soaring inflation in recent months has prompted the Bank of England to increase the base interest rate several times. Since December 2021, the base rate has risen six times, with five increases of 0.25% and the latest increase of 0.5%. This has taken the base rate from 0.25% in December to 1.75%, putting increased pressure on borrowers who are already struggling with rocketing living costs.
However, the situation could worsen with the Bank of England predicting that inflation could peak at 13% by the end of this year. As a result, traders now believe that the central bank could more than double the base rate over the next six months to tackle inflation. This comes after recent figures showed that CPI inflation rose to 10.1% in the year to July.
Increasing the chances of a deeper recession
Some traders predict the Bank of England could increase the base rate by another 2% in the coming months, putting the country at risk of a deeper recession. Although savers may benefit from the ongoing rate increases, it will seriously impact many mortgage borrowers and those with debts.
There is speculation that the next base rate hike in September will be another super-sized one of 0.5%. The bank has already said it will continue to take aggressive action over monetary policy tightening to bring down inflation, which could mean continued rate hikes over the coming months.
Jamie Niven, a senior fund manager at Candriam, said that the Bank of England faces some difficult decisions in the current climate.
He said: “The central bank is really stuck between a rock and a hard place as further tightening is almost certainly set to cause a deeper recession.”
Rates not being passed to savers
Concerns have been expressed over the impact of these rate increases on borrowers who are already struggling to make ends meet due to the soaring cost of food, petrol, energy, and other essentials.
Further concerns have now been raised over banks and building societies failing to pass on the rate increases to savers despite being quick to pass them on to borrowers.
Simon Jones, the CEO of InvestingReviews.co.uk, said: “Savers are being denied the full benefit of interest rate rises despite borrowing costs climbing sharply and without delay. This is a double-edged sword hurting those with money on deposit. Mortgage and credit costs are rising while stubbornly low rates of return on savings are the sting in the tail.”