BoE holds off on interest rate rise

The Bank of England (BoE) has announced it is to keep the base interest rate at 0.1%.

Recent speculation among economists had suggested the Bank was about to raise the cost of borrowing, however the BoE’s Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the all-time low base rate.

UK GDP increased in the third quarter although this rise came at a slower pace than projected in the BoE’s August report. The Bank now expects UK GDP to get back to its Q4 2019 level in Q1 2022.

The Bank’s latest report also revealed that 12-month CPI inflation fell slightly from 3.2% in August to 3.1% in September. Inflation is now anticipated to rise to just under 4% in October, and to 4.5% in November, before remaining around that level through the winter, accounted for by further increases in core goods and food price inflation. Wholesale gas prices have risen sharply since August, and the BoE has forecast CPI inflation to peak at around 5% in April 2022.

This inflation figure is materially higher than expected in the August report, which could explain the Bank’s reluctance to raise the base rate above 0.1%.

Killik & Co associate investment director, Rachel Winter, commented: “Although last week’s Budget promised to ‘protect the country from rising inflation and interest rates’, the pledge to raise the UK’s national living wage by 6.6% could contribute to an upwards inflationary spiral.

“The rise in wages could potentially force firms to raise prices, resulting in inflation and forcing employees to demand yet higher wages to cover the rising cost of living. An interest rate rise should put the brakes on demand and hopefully prevent inflation from rising further, and the BoE will no doubt be watching the situation incredibly closely.

“Although borrowers will be relieved by today’s decision, many people will be concerned about the impact of rising inflation on their finances. The prevailing interest rate is still far lower than the inflation rate, and therefore the value of cash savings will continue to erode over time.”

Legal & General Mortgage Club director, Kevin Roberts, added: “Despite growing pressures to tackle rising inflation, it is encouraging to see today’s decision not to raise the UK base rate. Amidst unwinding government support, helping to keep borrowing costs to a minimum will support people across the UK by ensuring their mortgage and credit repayments remain at historic lows.

“Whilst a low rate should keep the market competitive, for those worried about the future of their mortgage, along with those simply coming to the end of their existing mortgage term, the key now is to seek advice.”

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