‘Pain not over yet’ as BoE interest rates are expected to rise again

Suren Thiru discusses the rise in interest rates

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The Bank of England Bank Rate has seen another spike in an effort to help curb the UK’s spiralling inflation. While Consumer Price Index (CPI) rates took a slight dip to 9.9 percent in August, figures hit double-digits again in September of 10.1 percent, causing the bank to revise its Base Rate for the seventh time this year.

Since December 2021, the Bank of England has successively increased its key interest rate, Bank Rate, from 0.1 percent to three percent.

Why are interest rates rising?

Tom Hopkins, portfolio manager at BRI Wealth Management said: “The Bank of England is raising interest rates to reduce demand for goods and services, which should in turn reduce the level of inflation.”

The annual inflation rate in the UK increased to 10.1 percent in September, which is much more than the Government-set inflation target of two percent.

Mr Hopkins said: “Inflation is high because the demand for goods and services has risen now that economies have re-opened post Covid lockdowns. The war between Ukraine and Russia has exacerbated these inflationary pressures, given that these countries are major exports of food and energy.”

He continued: “By raising rates, it then costs more to borrow money, but it also means you can earn more on your savings – so people may be encouraged to borrow less and save more.”

This should, in turn, reduce demand for certain goods and services, which could slow inflation down.

However, Jason Hollands, managing director at Bestinvest, added: “The UK is not alone in seeing sharp increases in interest rates to combat inflation. It is a similar picture across the globe, with rates rising in the US, across Europe and as far afield as Australia.”

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How high could interest rates increase?

According to Mr Hollands: “The pain is unfortunately not yet over.”

He said: “Market expectations of where rates might peak is around 4.75 percent. That’s actually settled back a little since the immediate aftermath of Kwasi Kwarteng’s ill-fated mini-Budget.

“But much will depend on whether there are signs that inflation has peaked over the coming months. There are some reasons to be hopeful, as gas prices have fallen significantly since September.”

However, while the Government doesn’t have direct control over the interest rates, it can indirectly influence the direction.

Mr Hollands said: “In the upcoming Budget, mooted tax rises and spending cuts are going to squeeze people’s pockets further, reducing demand for goods and services, which, while painful, should have the effect of easing inflation.

“However, the price could well mean a deeper and longer recession as a result, which may eventually prompt the Bank of England into pausing rate hikes and then potentially reducing rates a little.”

But, Mr Hollands continued: “We are unlikely to return to the record low rates we enjoyed until a year ago anytime soon – possibly not in our lifetimes – as these were emergency measures put in place initially during the global financial crisis of 2008 when the banking system nearly collapsed and then extended to support the economy during the pandemic.

“Prior to these major crises, interest rates were typically between four and seven percent this century, so four percent may be the new normal.”

How to protect finances

Mr Hollands said: “It is vital that people recognise that borrowing costs have fundamentally changed and must take action to address this.

“First of all, people should pay down their most expensive borrowings, such as credit card debts, as far as they can.

“If a re-mortgage is looming, take action now to see where you have scope to cut back on outgoings to cope with the additional costs that lay ahead by running through all your regular expenditure.

“This can be time well spent, as you may be able to identify memberships and subscriptions you can live without, small luxuries that can be cut back on, and see if you can get better deals on insurance or phone tariffs.”

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