Bank of England expected to raise interest rate to 13-year high to tackle inflation

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The Bank of England is expected to increase its base interest rate to the highest level in 13 years in a bid to tackle inflation.

It is predicted to rise to 1% amid soaring food, energy and fuel prices that saw inflation hit a 30-year high of 7% in March.

The base rate is the interest rate that the Bank of England charges commercial banks for loans and currently stands at 0.75%.

The change, due to be announced today, would mean higher mortgage payments for more than two million home owners with variable rate mortgages.

It would also increase the cost of other loans, cutting what consumers have available to spend elsewhere.

Those who are saving money would see higher interest payments – but it can take some time for bank rate changes to be passed on to consumers.

The bank is also tipped to raise its forecast for inflation – which it previously said would hit 8% in April and grow further this autumn.

More on Bank Of England

The cost of living crisis is set to worsen in October, when another increase in the energy cap is expected.

Some households are already facing a nearly £700-a-year rise in their energy bills after the cap went up by 54% in April.

Increased bills were prompted by growing wholesale energy prices, which have shot up since Russia invaded Ukraine.

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How has inflation impacted everyday items?

The UK is not the only country seeing growing interest rates.

The US Federal Reserve raised its rate to a range of 0.75% to 1% yesterday, while the Reserve Bank of Australia revised its rate from 0.1% to 0.35% – the first rise in 11 years.

Read more: See how much your spending has increased over the past five years

‘Economic risk’

Governor Andrew Bailey recently said the bank is walking a “narrow path” between growth and inflation, and implied that the bank could take a more incremental approach to tightening, rather than following the US Federal Reserve with a 0.5% hike.

Markets expect the bank rate to hit 1.25% later this year, going up to 1.5% by mid-2023.

Berenberg Bank Senior Economist Kallum Pickering said the hike is “not without risk”.

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“On a policy relevant horizon – of say two years from now – the Putin shock will probably depress demand growth, which may also affect inflation dynamics over time,” he said.

“If we are unlucky, the UK is already in the early stage of a recession.

“Amid unusual uncertainty, policymakers – who should aim to minimise output losses over the business cycle – would better keep policy unchanged for now until incoming data dictate the appropriate policy response.”

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