Bank of England hikes key interest rate to 4.25%

The Bank of England (BoE) has raised its base rate by 0.25% to 4.25%, its highest level since October 2008.  

The central bank was widely expected to hike rates today following a surprise jump in inflation to 10.4% as announced by the Office for National Statistics yesterday. 

Still, the rate-setting Monetary Policy Committee (MPC) faced a difficult balancing act going into their meeting today. 

The collapse of Silicon Valley Bank and Credit Suisse has caused turmoil in the banking sector, leading some analysts to predict the BoE would pause hikes to reassure markets. 

But it seems the BoE believes the fight against inflation is more important as it runs over five times ahead of the central bank’s 2% target.

“No one could say the Bank of England’s decision to raise the base rate to 4.25% was unexpected,” says Emma-Lou Montgomery, associate director for personal investing at Fidelity International 

“The surprise jump in UK inflation to a 45-year high of 10.4% in February, while an 11th-hour shock, only reinforced expectations that the BoE would have no choice but to raise interest rates again.

“The Bank of England also had no choice but to acknowledge that inflation is firmly in the driving seat, with concerns over the global banking crisis set aside in favour of tackling a troubling spike in the cost of living,” said Montgomery. 

The BoE’s hike follows the Federal Reserve, which hiked interest rates by 0.25% yesterday. 

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 CPI inflation rate was expected to continue to slow in February, with analysts projecting a figure of 9.9%. However, the rate came in much hotter than expected at 10.4%.

Food inflation is running at 18.2%, its highest-ever level. Rising prices at restaurants and hotels also increased 12.1% year-on-year in February. 

The BoE is attempting to get inflation under control by hiking interest rates, and encouraging savers to put money away and not spend it. 

But while savings accounts now offer some of the best rates in years, higher borrowing costs are projected to weigh on economic growth. 

The 0.25% hike is gentler than the past two 0.50% hikes and the 0.75% increase last November. And “with the decision from the nine-strong Monetary Policy Committee split - with seven favouring a 0.25% increase and two wanting no rate hike at all - it signals some trepidation about pushing ahead with a rate rise amid the uncertainty,” says Alice Haine, personal finance analyst at Bestinvest. 

The Office for Budget Responsibility (OBR) expects the UK economy to shrink by 0.2% this year, although it no longer expects the UK to enter a recession in 2023. 

Furthermore, the International Monetary Fund expects the UK to be the only G7 economy to shrink in 2023. 

The OBR also expects the rate of inflation to fall to 2.9% by the end of the year, but right now the forecast seems optimistic, and the latest data from the ONS shows the path there is far from straightforward. 

The bank also acknowledged the economic impact of the failure of SVB and Credit Suisse, adding it would issue a full assessment in its next update in May. Still, it said the UK banking system “maintained robust capital and strong liquidity positions and was well placed to continue supporting the economy”. 

Will the Bank of England continue to raise interest rates?

“Whether this is the end of the rate hiking cycle is unclear, but thankfully, the outlook from here is not entirely bleak,” continues Haine.

“The UK narrowly avoided a recession last year and is expected to do the same in 2023. In addition, both the BoE and the Office for Budget Responsibility expect inflation to slide as a result of easing wage growth and falling energy prices.”

Following the chaos caused by the mini-Budget last September, analysts were expecting rates to rise to as much as 6%, but now analysts now estimate rates will peak at 4.5%. 

Andrew Bailey, the BoE’s governor, has said that even though inflation had started to fall the Bank couldn’t afford to take its foot off the pedal and risk a return to the levels of inflation seen in the 1970s. Two MPC members voted to maintain the rate at 4%. 

Encouragingly, the BoE said it expected inflation to fall sharply over the coming months as energy prices decline, which could signal an end to the rate hikes in the near term. 

However, the Bank said “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”, so at this point, it’s still a waiting game. 

What do rising interest rates mean for you? 

Rising interest rates increase the cost of borrowing, meaning mortgage rates are likely to rise in the coming weeks. 

“A rise to base rate will come as disappointing news to borrowers who are not locked into a fixed rate mortgage, as their monthly repayments may rise in the coming months amid a cost of living crisis,” says Rachel Springall, finance expert at Moneyfactscompare.co.uk. 

But borrowers looking to refinance “might be pleased to see that fixed-rate mortgages have fallen since the tail end of 2022 and that it is currently cheaper on average to lock into a five-year fixed rate over a two-year fixed deal”, says Springall. 

“The incentive to fix is clear from the continued rise to the average Standard Variable Rate (SVR), which is now above 7%, a level not breached since 2008,” Springall adds. “A rate rise of 0.25% on the current average SVR of 7.12% would add approximately £772* onto total repayments over two years.”

However, affordability will remain an issue for first-time buyers.  “With this most recent increase in the base interest rate, the cost of borrowing remains much higher than previous years,” says Kellie Steed, mortgage expert at Uswitch. “Buyers who are not yet on the property ladder will need sizable deposits in order to access the most favourable interest rates.”

“It's possible that first-time homebuyers will find it more affordable to purchase a home towards the end of 2023 because both house prices and fixed mortgage rates are anticipated to continue falling throughout the year,” adds Steed.

The property market has been slowing down for months due to rising rates. Most house price indexes show house prices have been falling over the last few months. 

The latest data from HMRC showed property transactions are down by nearly 20%, and the OBR expects prices will fall 10% by 2024. 

And it's not just mortgages they're becoming more expensive. All rates on types of borrowing, from car finance to credit cards, are likely to rise following the BoE's announcement. 

“While unsecured borrowing such as a personal or car loan is not typically impacted by an interest rate rise because the terms of the finance have already been agreed, those with credit card debt or an overdraft could see their rates change if their lender passes on the rise in borrowing costs,” says Haine. 

As for savers, even though they have been enjoying better rates on savings accounts, higher interest rates don’t always translate into higher savings rates. 

“It could take months for the increase in interest rates to trickle through to savers – if at all,” says Myron Jobson, senior personal finance analyst at interactive investor. “The acceleration in the frequency of rate rises has meant that some savings providers may still be catching up to past base rate rises.”

If inflation does fall to 2.9% as the OBR has predicted, the savings rate increase cycle could be “nearing its end”, says Jobson. 

“But there is still plenty of uncertainty, and inflation could remain stubbornly higher for longer,” continues Jobson. “While you might get a better rate in the near future, there are no guarantees – and an uptick in savings rates could mean the difference between pennies and hundreds of pounds depending on how much you have to save.”