The Monetary Policy Committee of Bank of England (MPC), announced today that it is increasing interest rates 0.5% to 1.75%. This is the largest increase in interest rates in 27 years.
At its meeting on 3 August 2022, the MPC voted by a majority of 8–1 to increase Bank Rate by 0.5 percentage points. One member preferred to increase the Bank Rate by 0.25 percentage point to 1.5%.
The decision comes after inflation hit a 40 year high. Inflation is expected to peak at 13% this October. Inflationary pressures continue with a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
The impact of today’s announcement will impact people in different ways. Those paying typical mortgages, for example, will have to pay about £52 more per month. Those on standard variable rate mortgages will see a £59 increase. The same applies to those with student loans, personal loans, and credit cards.
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Before December 2021, tracker mortgage customers paid about £167 less than what they will now, and variable mortgage holders about £132 less.
The rise in interest rates has also led to inflation challenges in other countries. The Federal Reserve, the US central bank, has increased rates by 0.75 percent in recent months, bringing US interest rates up to 2.5%.
The European Central Bank recently raised rates in Europe for the first time since over 11 years.
Current focus of the Conservative leadership battle is on how to tackle inflation. Rishi Sunak, Liz Truss, and Liz Truss are taking different approaches to the economic crises. Truss advocates drastic tax cuts. Sunak believes this will only lead to more inflation and increase the pressure on banks to raise interest rates.