Bank of England raises interest rates to 4.25% in eleventh hike in a row

How are people coping with the rising cost of food and mortgage repayments? ITV News' Joel Hill reports

The Bank of England (BoE) has increased interest rates from 4% to 4.25%.

Seven members of the BoE’s Monetary Policy Committee voted for the hike - but two members opposed it, arguing that some of the recent rises to the base rate have not yet filtered through into the real economy.

The case for an interest rate hike was strengthened by official figures on Wednesday revealing a surprise jump in inflation - the increase in prices of goods and services over time - to 10.4% last month.

Following Thursday's decision, the BoE has now put up interest rates 11 times since November 2021, as it seeks to make borrowing money more expensive and encourage people to spend less in the hope of curbing inflation.

But it means many homeowners could face much more expensive mortgage repayment bills, and could also influence the amount charged on credit cards and loans.

According to Moneyfacts, the monthly repayment of the average two-year fixed rate mortgage has risen by £325 in the last 15 months. Today’s decision adds an extra £30 a month on top.

The BoE faces a difficult balancing act: weighing up the need to rein in inflation with the worries over banking woes and the possibility they may start to clamp down on lending.

The MPC recognised the recent period of volatility in the global banking sector, after the collapse of the US’s Silicon Valley Bank and the rescue takeover of Credit Suisse, but stood firm in its mission to bring inflation back down to its 2% target. “The economy has been subject to a sequence of very large and overlapping shocks,” policymakers said. “Monetary policy will ensure that, as the adjustment to these shocks continues, CPI inflation will return to the 2% target sustainably in the medium term.”

A view of the Credit Suisse UK offices in Canary Wharf, London. Credit: PA

The MPC said it would make a “full assessment” of recent banking woes and market volatility in its forecast in May, and that it was monitoring the situation closely.

In other developments, the BoE expects gross domestic product to increase slightly in the three months from the start of April, reversing an earlier forecast that it would fall by 0.4%.

The government’s decision to cancel a planned £500 rise in energy bills at the start of April will also help households, the Bank said. “Real household disposable income could remain broadly flat in the near term, rather than falling significantly,” the Bank added.

Why do interest rates impact inflation?

In simple terms, the base rate is used by normal banks to help them decide what interest rate to charge borrowers, and also what to pay to savers.

This means that people taking out a mortgage will have to pay more interest on their loan.

That means they have less money left in their pockets by the end of the month, which reduces the amount they spend with shops and businesses.

This reduces demand in the economy, which puts less pressure on supplies of goods and services.

This means that businesses may supply their goods and services at a lower price, or at least not raise prices as rapidly.

Inflation measures the prices of what households buy, so if prices are not rising rapidly, inflation is low.

Responding to the latest interest rate hike, Chancellor Jeremy Hunt said: “With rising prices strangling growth and eroding family budgets, the sooner we grip inflation the better for everyone. “That's why we support the Bank of England's actions today and why we will continue to play our part in this fight by being responsible with the public finances, alongside providing cost of living support worth an average of £3,300 per household over this year and next.”

The chancellor’s spring Budget earlier this month could increase GDP by about 0.3% over coming years, the BoE added.

Shadow Chancellor Rachel Reeves said today's interest rate announcement would likely concern families who will be thinking about how their finances will be impacted by it.

“The government think the cost of living crisis is over but the reality is that too many families are dealing with a Tory mortgage penalty and battling with soaring food prices," she said. “That’s why their choice to give the top 1% of pension savers a £1 billion tax cut while working people’s taxes go up is so unjustified."

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