The Bank of England has squashed industry-wide doubts by increasing the base rate to 0.25%, in a bid to control mounting inflation risk. The rise marks the first in over three years of savers enduring low and regularly reduced rates.
The Monetary Policy Committee voted overwhelmingly in favour of higher interest rates despite concerns around a new wave of coronavirus variant slowing down spending. The decision comes after accusations from the International Monetary Fund of allowing inflation to spiral and warnings of facing inaction bias.
Although financial markets predicted the record low rate to be held due to Omicron developments, the central bank said that current economic conditions now justified a raise, explaining that “the labour market is tight and has continued to tighten, and there are some signs of greater persistence in domestic cost and price pressures.”
The bank also acknowledged that the “impact [of Omicron] on medium-term inflationary pressures is unclear at this stage,” which influenced the verdict.
With inflation now forecasted to reach a 6% high in spring, interest rates are likely to go up in 2022 to return inflation sustainably to the 2% target.
This is big news for savings – the long-awaited rise in the base rate should pave the way for other banks to offer better deals that attract savers. Improved savings rates will mean people can benefit from higher returns and tame the impact of inflation.
To limit the damage of rising living costs, savers can review where their cash is sat and switch to the best deals. Many high street banks offer ultra-low rates where cash earns little to nothing, but if moved to higher-paying accounts, could make a lot more money.
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