Interest Rates - August 2023

Earlier this month the Bank Of England raised interest rates to 5.25%.

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 2 August 2023, the MPC voted by a majority of 6–3 to increase Bank Rate by 0.25 percentage points, to 5.25%.

The Bank reported that inflation has initiated a decline, the economy is on an upward trajectory, and unemployment remains at a low level.

However, the inflation rate remains excessively high. In June, prices saw a 7.9% increase compared to the previous year, a substantial deviation from the Bank’s targeted rate of 2%.

The Bank reported that the most effective approach to ensure a reduction in inflation is to implement an increase in interest rates, explaining that if they defer the increase in interest rates, the risk of prolonged high inflation would be a concern.

The reported stated:

Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.

Projections indicate a further reduction in inflation to approximately 5% within this year, with an anticipation of achieving the 2% target by early 2025. Consequently, this implies that prices would continue to rise, albeit at a gradual pace.

Source: Bank Of England