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Interest Rates Up as Bank Responds to Rising Inflation

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Written by: Jonathan Munnery

The base rate of interest has been increased by the Bank of England by a quarter point to 0.5 per cent in an effort to curb rising inflation across the UK economy.

Prices have been rising at notably higher rates than the Bank would want in recent weeks, with some estimates suggesting the headline rate of inflation could soon be above 7 per cent.

With the economy still needing to recover from the impacts of the Covid pandemic, support for an interest rate rise was not unanimous among the Bank of England’s rate-setting monetary policy committee (MPC).

However, a majority on the MPC voted for a rise and four of its nine members voted for a 0.5 per cent increase to the base rate of borrowing.

The Bank has a target of keeping headline rates of inflation no higher than 2 per cent as a central part of its overall remit, with interest rate increases one of the main tools at its disposal when trying to fulfil that brief.

In December 2021, rates of inflation across the UK were tracked at 5.4 per cent, which is the highest figure for price rises recorded since the early 1990s.

Supply chain logjams have been contributing to price rises in shops nationwide but the issue of energy price increases has emerged as a massive contributor to inflationary pressures in recent months.

British consumers can expect to see the average costs of covering their energy bills increase very significantly in 2022, with Ofgem having this week said it will raise its price cap by some 54 per cent from April 1st.

Chancellor Rishi Sunak has responded to the energy regulator’s announcement by promising discounts and financial support for households struggling to pay their energy bills each month.

However, it is widely anticipated that energy price rises will continue contributing in a big way to further jumps in inflation over the next few months.

The Bank of England’s own forecasts suggest inflation should peak at around 7 per cent in April, with its expectation currently that there will need to be a series of increases to the base rate of interest over the course of this year.

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