Base rate rises for fourteenth consecutive time

On 3rd August 2023, the Bank of England Monetary Policy Committee announced the increase of base rate from 5% to 5.25%. A slightly smaller increase than previous rises as high inflation appears to be beginning to ease.

The Bank of England motioned to increase interest rates by 0.25%, meaning the current base rate is now 5.25%. The Bank of England also warns that borrowing costs are likely to remain elevated, despite inflation beginning to slow down. This move brings borrowing costs to a 15-year high. The central bank’s Monetary Policy Committee voted by six to three to make the increase. Two members preferred a larger percentage of 0.5% whilst one voted to pause.

In June, inflation fell to 7.9%, a bigger decline than expected. Most economists had forecast an increase of a quarter-point after the previous meeting held by the central bank. However, the MPC warned that “it was still too early to conclude that the economy was at, or very close to, a significant turning point”.

The updated forecast from the bank suggests that even if interest rates continue to rise further, in line with recent expectations of the market, it will still take until mid-2025 for inflation to fall to the Bank of England’s target of 2%. The Monetary Policy Committee said this was because it now saw evidence of a feedback loop developing between wages and prices. This means that “some of the risks of greater persistence had crystallised”.

Reiterating guidance provided previously, the bank said further tightening of monetary policy would be crucial if it saw more evidence of persistent inflationary pressures. It also said that it would “ensure that the bank rate was sufficiently restrictive for sufficiently long enough to the 2% target”.

The Bank’s governor, Andrew Bailey said, “inflation is falling and that’s good news. We know that inflation hits the least well-off hardest. We need to make sure that it falls all the way back down to the 2% target. That’s why we’ve raised rates to 5.25% today.”

The Bank of England said it expected gross domestic product growth to remain steady at a quarterly pace of 0.2% in the near term. It also expects inflation to continue falling in the near term, averaging 6.9% in the third quarter of 2023 and 4.9% over the fourth quarter, with an expected fall in energy prices.

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