On 03 August 2023, the Bank of England Monetary Policy Committee (MPC) made the decision to once again raise its base interest rate by 0.25 percentage points. This has brought Bank of England Base Rate to 5.25%. This move came in response to persistently high inflation rates in the UK economy. The decision met the expectations of economists and the market, indicating that the increase was widely anticipated.
The bank’s decision to raise interest rates was driven by concerns about the rising cost of living and inflation pressures. Even though inflation rates are beginning to reduce, they are still considerably higher than the Bank of England’s target of 2%. By increasing interest rates, the bank aims to reduce consumer spending and investment, which, in turn, could help stabilise prices and bring inflation under control.
The 25 basis point (0.25%) increase was the latest in a series of moves by the central bank to combat high inflation. Earlier in the year, the MPC voted to increase the Bank Rate by the varying amounts up to 0.5% at a time.
Expectations for interest rates for the rest of 2023
Looking ahead, there are speculations about the potential trajectory of interest rates for the rest of 2023. Some analysts believe that further increases are likely, with the possibility of rates peaking at less than 6% by the end of the year. Any projection, though depends on the effectiveness of the measures taken by the Bank of England to control inflation and the other economic factors.
Several factors can influence the future rate increases, including the path of inflation, employment levels, and overall economic growth. If inflation continues to surge and shows signs of getting out of control, the central bank may be compelled to implement more base rate increases to further curb consumer spending and investment. The Chancellor, Jeremy Hunt has suggested that he would be comfortable with “Britain being plunged into recession if that’s what it takes to bring down inflation.” (Sky News, 26/05/2023)
On the other hand, once the economy shows signs of slowing down or inflation starts to moderate, the bank could then take a more cautious approach and slow down or stop the pace of rate increases. It is essential to monitor economic indicators closely to gauge the Bank of England’s future actions.
Impact on Swap Rates and fixed rate mortgage deals
The increase in the Bank of England base rate can have significant implications for swap rates. Swap rates are influenced by various factors, including central bank interest rates, inflation expectations, and overall market sentiment. The feeling prior to today’s decision was that should the Bank of England Base Rate increase only be 0.25% then that was already “baked in” to Swap rates and so would not have a massive effect on mortgage rates in the short term. Of course some lenders lend against bank rates so their rates could rise.
Overall, the impact on swap rates will depend on how the financial markets perceives the central bank’s actions and its future base rate projections. Financial institutions closely watch for any signals from the Bank of England about its future monetary policy stance, as this can influence swap rates’ movements.
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