The Bank of England (BoE) announced on Thursday that the interest rate would increase by 0.25% to 0.5%.
On the 2nd of February the BoE’s Monetary Policy Committee (MPC) voted, with results of 5 votes to 4, to increase interest rates by 0.25%. Those who voted against the 0.25% increase had supported a 0.5% increase to a 0.75% interest rate.
The increase has been put in place in an effort to curtail high – and rising – inflation rates. The Consumer Price Index (CPI) inflation rate was reported as being 5.4% in December, and is expected to continue rising for some time, with the BoE predicting it to peak at 7.25% in April, which would be the highest rate since 1991. The BoE has a stated goal of keeping inflation as close to 2% as possible.
The increase to interest rates will make borrowing more expensive by increasing the amount of money that must be repaid. Monthly payments are expected to increase by an average of around £25 for those on a tracker mortgage, and around £15 for those on a standard variable mortgage.
Those with savings will see greater returns due to the increase, although still nothing comparable to the returns seen before the 2008 recession.
The BoE recently increased the interest rate from 0.1% to 0.25% in December of last year, but the bank has cautioned against assuming that interest rates will experience a string of increases. BoE Governor Andrew Bailey said:
“It would be a mistake to extrapolate simplistically from what we have done today and assume that rates are now on an inevitable long march upwards.”
The BoE also warned that:
“If the economy develops broadly in line with the February Report central projections, some further modest tightening in monetary policy is likely to be appropriate in the coming months.”