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Have the Bank of England made the right call?

by Gabriella Bedford 3 months ago in economy
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Was the recent base rate rise a good move?

Image: George Rex

The economy is a crucial part of how a country functions and it is often controlled by two things: inflation and interest rates. Yet the current economic climate you are in changes how you view the economy, interest rates and inflation meaning everyone has a unique perspective.

In this article, I’ll take a look at what it’s like in the UK after the Bank of England made a big monetary policy announcement and how that affects how the UK will be in the coming months and years.

For those who do not live in the UK, let me paint a picture of how the economic land lies here. The top easy-access savings rate is often 1.5% and anything higher sends the personal finance journalists into a frenzy. Borrowing is cheap in the UK, which is why so many are in debt, inflation rarely goes above 5% - until now.

On the 5th August 2022, the Bank of England announced that the base rate would rise to 1.75% - the highest it has been since the 2008 financial crash, the biggest single increase (0.5 percentage points) since 1995. In other words, bad news and a reaction to predictions that inflation was going to hit 13%.

This sent shockwaves into households across the country. Already crippled by out of control energy bills and spiralling food costs, an increase in borrowing costs (as 54% of the nation are in debt) is the last thing that people need in these uncertain times.

The logic behind this move was evident, typically, to control inflation, interest rates are raised in order to stop spending and encourage saving. But these are not typical times. People were already cutting back on their spending before the rate rise as the cost of living was becoming too great. This is not just hitting the poorest in society fighting to survive, this hits everyone.

Surely the Bank of England must have considered this? Sure, they have the unenviable job of making decisions that will not only help the nation’s economy but also protect businesses and people’s financial security.

For the vast majority of individuals and enterprises, this will have a negative impact. In a time when the cost of living is driving thousands of families to foodbanks, a further increase in costs is the polar opposite to what they want as most in the UK have some form of debt.

As for UK businesses, the Coronavirus pandemic lead to more and more enterprises taking on debts as many made little revenue yet still had rising costs. These debts are likely to be at higher rates than personal loans meaning the impact of a rise will be greater. The government often direct their focus on the small businesses of the nation, but the Bank of England’s rate rise does nothing to help them.

The only motivating factor behind the rise is that it is the ‘typical’ way to deal with inflation. It is a fundamental of economics, if inflation is rising and you want to reduce it, you rise interest rates. The main reason it has been done is down to this: imported inflation.

According to the Bank of England, 80% of our current inflation is imported (likely due to the rising fuel costs) and this rate hike supports the pound and should lead to reduced inflation.

This is a perfectly sound theory, but it does not in the slightest help millions of struggling families across the country, it does not help the small business of the UK, it does not help stop inflation rising this year. That still leaves me wondering why they even bothered?


About the author

Gabriella Bedford

Attempting to be an automotive and business writer. Not too bad at stringing a sentence together.

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