Bank of England hikes base rate to 4.5%

The Bank of England has hiked rates again as it continues its battle with inflation.

BoE at night
(Image credit: © Getty Images)

The Bank of England (BoE) raised its base rate by 0.25% to 4.5% - its 12th consecutive hike as it continues to grapple with stubborn inflation.

The Monetary Policy Committee was widely expected to hike the base rate following April’s inflation figures. The Consumer Price Index (CPI) rose by an annual 10.1% in March due to a 19.1% jump in the price of food and non-alcoholic beverages.

The BoE has been aggressively hiking interest rates for over a year now as it tries to get inflation back to its target of 2% – a task that has so far been complicated by record food prices and high energy costs.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Its decision followed the US Federal Reserve, which last week raised its key rate by 0.25% to a range of 5% to 5.25%.

The Fed indicated its tightening cycle might be coming to an end, but the same cannot be said for the BoE. Inflation across the pond has fallen to below 5% for the first time since April 2021, but it’s proving far stickier in the UK.

But the UK is experiencing some pressures unique to the country, which are having a big impact on inflation, as Rob Clarry, investment strategist at wealth manager Evelyn Partners notes:

"First, like the rest of Europe, the UK has experienced a major energy price shock since the Russian invasion of Ukraine."

"Second, the UK has experienced far greater labour shortages than the rest of Europe, similar to what we have seen in the US. Many young European workers have left the UK after Brexit and older workers are leaving the labour force due to long-term sickness. This has placed upward pressure on wages and inflation."

Wholesale energy prices are predicted to fall from July, which could help lower the rate of inflation. Additionally, the chancellor said in his Spring Budget he expects inflation will fall to 2.9% by the end of the year, but in the face of the current figures that estimate seems overdone.

"We expect to see UK inflation start to ease as the base effects turn more favourable and the impact of higher rates is felt by the real economy. In its latest forecasts, the BoE now expects inflation to fall to around 8% for Q2 and 5% by Q4. They expect to meet their 2% target by the end of 2024," says Clarry.

We’ll be updating this page throughout the day with all the latest news and comment on the Bank of England’s latest move, so stay tuned.

Why is the Bank of England raising interest rates?

The rate of CPI inflation was expected to fall below 10% in March, but it came in at 10.1%. While this is a decrease from February’s rate of 10.4%, it’s still over five times the BoE’s 2% target.

The largest contributor to the CPI reading for the month was the food and non-alcoholic beverages category, followed by housing and household services such as electricity and gas.

By hiking interest rates the BoE is hoping to encourage consumers to save money instead of spending it, as higher interest rates increase the cost of borrowing while encouraging lenders to improve the rates on their savings products.

"Increasing interest rates is the main tool central banks use to lower inflation, as it leaves consumers with less disposable income to spend on goods and services, which in turn encourages price setters to keep prices low," says Alice Haine, personal finance analyst at Bestinvest.

"So far, this monetary policy tool is not achieving the desired effect fast enough with household budgets still held hostage by stubbornly high prices," adds Haine.

The best savings accounts are offering the most attractive rates in years, but rising rates have also weighed on the economy.

Members of the MPC have indicated they’re split on whether rising rates further is the way to go. Higher rates are weighing on the property market as they are pushing up mortgage rates, which is prompting many to delay their buying plans.

Haine notes "An estimated 700,000 UK households missed or defaulted on a rent or mortgage payment last month, according to Which?, reflecting the strain higher housing costs can have. Those nearing the end of a fixed-rate opportunity have had little opportunity to catch their breath and take stock of the mortgage market before locking in a fresh deal."

"Whatever happens in the short term, the 1.4 million people with cheap fixed rate deals expiring this year are now facing a significantly more expensive mortgage market than the one they left two or five years ago."

By discouraging spending the BoE is also slowing down the economy. And though the OBR no longer expects the UK to enter a recession in 2023, it still expects the economy to shrink by 0.2% this year.

As Oliver Faizallah, head of fixed income research at Charles Stanley, comments, “Going forward, the Bank of England have a very difficult job, navigating high inflation with a fragile economy. The Bank is likely to remain data dependent as they decide whether to pause or keep hiking. Policy makers and market participants will be looking closely for signs that show that the UK economy is finally giving in to the pressure of all the hikes to date, which would give them confidence that inflation will fall back to target sooner rather than later."

That said, there are signs the economy is holding up better than expected in the face of higher interest rates.

“Growth has certainly been subdued, but the consumer is bouncing back with increased confidence and demand for food services, pubs and restaurants, despite the cost-of-living headwinds. While consumption is yet to return to pre-pandemic levels, a strong UK job market should continue to support consumer activity as we move into the summer months,” says James McManus, chief investment officer, at digital wealth manager Nutmeg.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.