England's Central Bank Maintains 4% Interest Rates
The lead decision maker at England's central bank refuses to comment on his stance regarding a recent financial speech. He maintains that the bank's choices are grounded in already established policies, and not influenced by external speeches or announcements.
Projections for Inflation
The bank's leader projects that inflation will likely drop to around 3% early in the coming year and then continue to decrease towards the bank's 2% target. It's important to remember that inflation reached a high of over 11% in previous years. It briefly touched the target of 2% last year but has been increasing for most of this year, fueled in part by the cost of food and energy.
Inflation May Have Reached Its Peak
Despite the recent high inflation rates, the bank's leader believes that we've likely seen the worst of it. However, he also warns that there are still risks ahead, and the bank needs to see more signs of decreasing inflation before they consider further rate cuts.
In a statement released with their interest rate decision, the bank stated that they believe inflation has reached its highest point. This is promising news for the average household. As a reminder, inflation was at 3.8% in September; this doesn't mean prices have stopped rising, but that they are increasing at the same steady rate as before.
What's Next for the Bank's Leader?
The mood outside the bank is energized. Inside, the decision to keep the interest rate at its current level was made by a very slim margin. The next meeting will take place in mid-December, and it will be up to the bank's leader to decide whether to bring holiday cheer or a dose of reality to the table.
Consumer spending remains cautious, and the bank now expects slower economic growth next year (1.2%) compared to this year (1.5%) - a development that will not be well received by the national treasury. The interest rate committee will have a lot to consider in the upcoming Budget – the size and design of tax increases, help with energy bills and possibly other cost of living challenges, and increases in the National Living Wage.
A Gradual Approach to Decision Making
The bank decided to maintain the current interest rates in a tight vote, with five in favor of keeping rates at 4% and four in favor of reducing them to 3.75%. This indicates a cautious approach, with the majority opting to wait and see how things develop in the coming months, especially considering the government's upcoming Budget.
The bank is confident that inflation has peaked at 3.8% - but that is still significantly above its 2% target. So, for now, there are no changes, but there may be good news for borrowers if the bank decides to cut rates at its next meeting in December.
The Impact of Interest Rates
Interest rates heavily influence the rates set by street banks and lenders. Higher rates have meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns. About 600,000 homeowners have a mortgage that tracks the bank’s rate, so rate cuts will impact monthly repayments.
The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing. But it is a delicate balance as high interest rates can harm the economy as businesses hold off on investing in production and jobs.
Who Will Be Affected?
Depending on individual circumstances, interest rates can impact different people in various ways. Mortgage holders with variable or tracker mortgages, or those securing new fixed-rate deals, will see a change in their monthly repayments if rates are altered.
If rates are higher, it becomes generally harder for first-time buyers as it becomes more expensive to borrow money for a mortgage. Higher rates usually mean increased charges for unsecured loans and credit cards, but people with savings should benefit from higher interest rates and get better returns on their money.
Lower rates, while making it cheaper to borrow, mean banks tend to offer lower returns on savings. Higher rates could also be good news for those nearing retirement, who might get a better annuity rate. This determines how much guaranteed income you get when you swap some or all of your pension pot for a secure income.
Understanding Interest Rates
Interest is simply the extra charge you incur when you borrow money. If someone lends you £10 at a 10% interest rate, you'll pay them back £11 - the £10 you borrowed, plus an extra £1 in interest (10% of £10). The bank's base interest rate dictates what rates most high street banks and lenders set, ranging from mortgages to credit cards and savings accounts.
When the bank increases its rate, borrowing becomes more expensive, but it also means that returns on savings accounts, which accrue interest, go up. When rates drop, borrowing becomes cheaper and saving rates typically go down. The bank's job is to keep inflation - the rate at which prices rise for goods and services - at an annual rate of 2%. It uses interest rates to try to keep it at that level.
Current Inflation Rate
Prices across the UK economy rose by an average of 3.8% in the past year. This is almost twice the bank's target of 2%, though it was also below the 4% that many economists had predicted. While it remains high, the annual food inflation rate fell to 4.5% — the first time it had dropped since March. This may provide some hope to households struggling to cover the essentials, and it is also a measure considered by the bank when thinking about rates.
