Bank of England Raises Interest Rate

Despite Omicron uncertainty, the interest rate is now at 0.25%.

December 19, 2021
Bank of England Raises Interest Rate
Ian Lewis

Written By

Ian Lewis

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The Bank of England has raised the interest rate for the first time in three years, in a bid to tackle surging price rises across many industries.

The rate has risen from 0.1% to 0.25%, after new data showed that prices were rising at their fastest rates for over 10 years.

Unexpected Timing?

The timing was seen as a little unusual by some financial commentators. The interest rate had been expected to rise a month ago at the last review, but in a move that surprised many it was instead held.

Since then, the Omicron variant of COVID-19 has caused widespread uncertainty, and it seemed a lot less likely that the Bank of England would make any changes while things were up in the air with how the new variant will pan out. Despite this, it has now made the change to raise the interest rate.

The rise in interest rates is aimed to help curb the surging rates of inflation, and could also see savings interest rates rise, although there is no guarantee of this.

However, whenever the interest rates rise it also impacts mortgage owners, with an expected rise of £15 per month for anyone on a tracker mortgage deal, and £10 per month for anyone on a standard variable rate mortgage. In total, two million customers are expected to have to pay more each month.

Bank governor Andrew Bailey has said that the inflationary pressures of the economy necessitated the move now. Inflation currently stands at 5.1%, the highest that it has been in the last 10 years, and the expectation is that it will continue to rise in 2022.

In the short term — that is, in the next two or three months — we think it can get to around 6%.

Andrew Bailey

One of the biggest industries affected is the wholesale gas market, which is one of the main drivers of inflation rises, pushing customers’ domestic energy bills has high as the current limits can go and causing many providers to have to go into administration, affecting millions of customers.

The Wrong Move, Say Some

The rise of the interest rate hasn’t been welcomed by all. Despite the bank stating that inflation has risen by more than expected and that the global economy had generally recovered after the initial dip caused by the emergence of Omicron, many feel it was the wrong time to make the move.

Suren Thiru, head of economics at the British Chambers of Commerce, said that the inflationary spike was mainly driven by global rather than national factors and so interest rates rising wouldn’t make much of a difference, and that the government instead needed to look at ways of solving the UK’s supply chain and labour shortage issues.

The Bank of England's decision to raise interest rates was surprising, given mounting uncertainty over the economic impact of the Omicron variant… While today's rate increase may have little effect on most firms, many will view this as the first step in a longer policy movement — not as a partial reversal of last year's cut.

Suren Thiru

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