Posted on: July 25, 2023
Why are interest rates going up?
11-07-2023 Correct at time of publication, but subject to change
Interest rates have been rising since December 2021 from a lowly 0.1% in November 2021 to 5% currently*, and it appears that rates may go higher still. Following the infamous September 2022 mini budget the increase in interest rates accelerated. It appeared that whilst Bank base rate was increasing the money markets could predict where this might end and as such retail rates started to reduce to a more sustainable level in the winter and early spring of 2023. However in recent months we have seen a further significant increase in interest rates from 4% in February to 5% and rising today.
So why is this?
The Bank of England openly admit they use interest rates as a tool to control inflation. The higher interest rates are the less money consumers have to spend, this curbs demand, in theory prices drop and hence inflation is controlled. By their own admission on the Bank of England website explainers “We are raising interest rates because inflation is too high. It’s just below 9% now and our target is 2%”
Inflation was starting to increase early in 2022, then the invasion of Ukraine came and this caused further inflation due to the effects on electricity, gas and grain and other essential goods. And as such UK inflation has increased peaking at around 10% for the 6 months to March 2023. Rates since then have softened but not to a level that the Bank of England would like to see. Food inflation remains stubbornly high and a shortage of staff in the private sector has seen wage increases of 6.9% to February 2023** Whilst this figure lags behind inflation it takes the heat of the interest rate increases and high inflation for many.
And so inflation remains stubbornly high, the figures for May 2023 according to website Rateflation the inflation rate was still 8.681%. This remains well ahead of the target rate of 2% and so I think we can expect further base rate rises until we see a more significant drop.
*Bank of England website “base rate data” June 2023
** income data research website June 2023
