Metis AM
Over the past two years, increased interest rates have affected households across the country as the Bank of England (BoE) responded to sharp rises in inflation.
At its most recent meeting on 2 November, the BoE’s Monetary Policy Committee (MPC) once again held rates steady at 5.25%. The September meeting marked the first time the MPC had paused rate rises since December 2021.
Many are now speculating about when the rate will peak and when it could start to fall. But with so many factors at play, it’s difficult to know for sure.
Read on to learn what affects the MPC’s decision to hold, raise, or lower rates and what could happen in the coming months.
The Bank of England has raised interest rates 14 times since December 2021
Prior to December 2021, interest rates in the UK had been at historic lows for over 10 years. In fact, the MPC had kept rates below 1% since 2009.
In 2021, though, inflation began to increase, and it continued to climb throughout 2021 and 2022. This was caused by a number of conflating factors:
- Covid-19 lockdowns created a shortage of supplies of many household goods, as factories were unable to function as normal. This wasn’t immediately noticed since many households reduced their spending at the same time.
- When the lockdowns ended, this shortage continued as manufacturers tried to catch up with the drop in production. Meanwhile, demand soared as more people were able to go back to work and return to their normal routines. This meant that prices rose as demand outstripped supply.
- The war in Ukraine further complicated matters, disrupting global supply chains. This was partly due to Ukraine being unable to export its usual produce, such as grains and vegetable oil, which increased the cost of food.
- The sanctions that were placed on Russian oil and gas meant that the price of fuel soared too.
As a result, the Office for National Statistics (ONS) reported that inflation in the UK had soared from 4.2% in October 2021, to a 41-year high of 11.1% in October 2022.
In response to the inflationary increase, the MPC began to raise interest rates. Since then, the base rate has risen from 0.25% in December 2021 to 5.25% in November 2023.
Several economic factors influence the MPC’s decision on whether to raise interest rates
The BoE’s MPC is tasked with keeping inflation at a target of 2%, so when it rises above this level, the committee must decide on the most suitable course of action to rectify this.
Often, interest rate increases are a helpful way to reduce inflation. This is because they encourage more people to save rather than spend, since cash savings generate higher rates of return while borrowing becomes more expensive.
When people save more than they spend, demand for goods and services falls, usually causing prices to fall soon after, thus reducing inflation.
Economic factors that the MPC considers include:
- The labour market – in particular, the rate of employment in the UK compared to the number of job vacancies
- Wage growth and how it compares to the rate of inflation
- UK Gross Domestic Product (GDP) and the economic outlook for the UK
- Services price inflation.
As well as deciding whether to change interest rates to bring inflation back to its target, the MPC can also use quantitative easing (QE) to achieve its target. QE is a way of boosting economic activity by purchasing government bonds and introducing more money into circulation.
QE is normally used when interest rates are already very low and economic activity has slowed, as had happened during the Covid-19 pandemic. Since then, the MPC has reduced the level of QE it implements, as a secondary measure to help bring inflation back to its 2% target.
Could the Bank of England raise interest rates any further?
Though inflation has fallen from its peak of 11.1% in October 2022, it is still significantly higher than the 2% target. In October 2023, the ONS reported that inflation was 4.6%. This means that prices are still rising, just more slowly than they were previously.
So what could this mean for the MPC’s interest rate decisions over the coming months?
Reuters reports that the BoE expects to keep monetary policy sufficiently restrictive for an extended period of time to ensure that inflation is brought back to the 2% target. This means that, while a further increase to rates is not out of the question (the MPC will next meet on 14 December), even if it is not needed, rates are unlikely to fall any time soon either.
The committee will continue to monitor economic data and projections to assess the most appropriate course of action.
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If you’re concerned about how rising interest rates could affect your wealth, we can help. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not a guide to future performance.
