Bank of England raises interest rates further to 5%

The Bank of England’s Monetary Policy Committee (MPC) has agreed its 13th consecutive rise in its base interest rates, which now stand at 5%

The 0.5 percentage point increase brings the bank’s base rate to its highest level since early 2008, prior to the global financial crisis that ushered in over a decade of close-to-zero interest rates. The decision follows yesterday’s release of April inflation data, which saw the Consumer Price Index unchanged on the previous month at 8.7%, as the Bank of England continues to aim to combat persistent high inflation and bring it back to its 2% inflation target.

Economists on the Bank’s MPC voted 7-2 in favour of the increase, with those opposing the rise preferring the base rate be held at 4.5%.

The increase comes despite concerns over the impact of rate rises on homeowners, as higher mortgage rates resulting from recent base rate rises as more borrowers’ fixed-rate deals come to an end. While interest rates remain well below the levels seen during the 1980s, the accelerated increase in house prices relative to incomes means interest payments will represent a greater share of household incomes.

The Bank of England has however justified the latest rate in the face of concerns on people’s household finances, arguing that rate rises do not appear to be impacting demand for goods and services, particularly as its expects inflation to fall significantly during the course of the rest of the year, with the steeper rate rise (a 0.25 percentage point increase was considered to be more likely earlier this week) necessary as a disincentive to businesses from raising prices and wages and exacerbating inflation.