Not a rise, but a leap: interpreting the latest (and largest) BoE rates increase

Another increase was widely anticipated. After all, the Bank of England’s Monetary Policy Committee have raised their base rate 12 consecutive times since December 2021 – with inflation still untamed. But today’s hike still came as something of a shock: 50 basis points, taking the base rate to 5%. It’s the highest it’s sat since April 2008.


What spurred the latest hike?


Much like the previous rate increases, this decision comes at a time when the UK economy faces a plethora of challenges. It’s no surprise that the number one culprit, though, is an enduring inflation issue that has grown in intensity over the past month. And cost concerns were bolstered following yesterday’s Consumer Prices Index (CPI) release from the Office of National Statistics. The latest figures portrayed a sombre state of inflation – 8.7%, far beyond the BoE's 2% target.


Seven of the Committee’s members voted for the hike, citing growing wage demands and unexpectedly high service sector inflation. Only two members of the Committee felt no new rise was necessary.


To make matters trickier for policymakers, last week's labour market data delivered significantly stronger results than expected. Contrary to expectations, the unemployment rate declined to 3.8%, while the inactivity rate dropped by 0.4 percentage points. The Bank of England considers a tight labour market, where there is an imbalance between supply and demand for workers, to be a contributing factor to rising wages and inflation.


What is the impact of a base rate rise?


The impact of a base rate rise can have various effects on the economy, financial markets, and individuals.


One major fallout from a base rate rise is an increase in borrowing costs. When the BoE raises interest rates, other banks typically follow suit by increasing their lending rates. This makes borrowing more expensive for businesses and individuals, which is bad news for mortgage holders already feeling the pinch.


On the other side of the coin, a higher base rate can provide an incentive for individuals to save more. With higher interest rates, savings accounts become a more attractive option compared to spending or investing in riskier assets. This can encourage saving and discourage excessive borrowing or consumption, which is what the Bank of England would expect.


To make the most of rising rates, savers can now ‘shop and switch’ to better saving account deals with ease. Cash deposit platforms (like Flagstone) let savers open multiple accounts with multiple banks, all in once place, and move cash between them without the paperwork. So savers can keep on top of the rate rises and make the most of the money they have.


See how much you could earn on your savings with Flagstone’s cash deposit calculator today.


This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.



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