Base rate increases to 2.25% in further attempts to curb inflation

The base rate has increased by +0.5% to an overall 2.25% the Bank of England have announced this lunchtime.

Interest is what you pay for borrowing money, and what banks pay you for saving money with them.

The Bank of England ‘base rate’ determines the interest rate they pay to commercial banks that hold money with them, and therefore it has a knock on effect as it influences the rates those banks charge people to borrow money – for example for mortgages – or pay on their savings.

If the base rate changes it is likely banks will change the rates they then charge if people are on variable rates, or rates linked to the base rate.

Base rate changes are seen as a lever to affect inflation, which currently is at 9.9% against a target 2%.

In August the rate rose by +0.5%, the largest rise in many years, and today’s rise means it is the highest since 2008.

The Bank of England said, “The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 21 September 2022, the MPC voted to increase Bank Rate by 0.5 percentage points, to 2.25%. Five members voted to raise Bank Rate by 0.5 percentage points, three members preferred to increase Bank Rate by 0.75 percentage points, to 2.5%, and one member preferred to increase Bank Rate by 0.25 percentage points, to 2%. The Committee also voted unanimously to reduce the stock of purchased UK government bonds, financed by the issuance of central bank reserves, by £80 billion over the next twelve months, to a total of £758 billion, in line with the strategy set out in the minutes of the August MPC meeting.”

“Since August, wholesale gas prices have been highly volatile, and there have been large moves in financial markets, including a sharp increase in government bond yields globally. Sterling has depreciated materially over the period.”

“The labour market is tight and domestic cost and price pressures remain elevated. While the Guarantee reduces inflation in the near term, it also means that household spending is likely to be less weak than projected in the August Report over the first two years of the forecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term.”

The full statement and explainer can be found here.

The next review takes place on 3rd November.