Interest rates reach 15-year high

The Bank of England has raised interest rates to 5.25 per cent, their highest level for more than 15 years, as it continues its fight against high inflation.

The quarter-point rise was announced on 3 August. It is the 14th rise in a row since December 2021, when rates stood at 0.1 per cent.

Inflation still too high

Inflation, the rate at which prices rise, is 7.9 per cent, well above the Bank's target of 2 per cent. It peaked at 11.1 per cent last October, the highest level for 41 years, driven by soaring energy and food prices after Russia's invasion of Ukraine.

The Bank says that although inflation is falling, price rises in services and wage growth remain strong.

A split committee

The Monetary Policy Committee was divided. Six members voted for a quarter-point rise, two wanted a bigger increase of half a point, and one voted to keep rates unchanged.

The Governor, Andrew Bailey, said rates would need to stay high for long enough to bring inflation back to target.

Mortgages

The rise is bad news for homeowners with tracker and variable-rate mortgages, whose payments will rise immediately. Around 1.6 million people with fixed-rate deals are expected to see them end by the end of the year, and many face much higher payments.

Average rates on two-year fixed mortgages have risen above 6 per cent, compared with around 2 per cent two years ago.

Rents are also rising sharply, as landlords pass on higher costs.

Savers

Savers are finally earning better returns, although the Bank and the government have urged banks to pass on higher rates more quickly.

The economy

The Bank now expects the economy to avoid recession, but to grow only slowly. It forecasts that inflation will fall to around 5 per cent by the end of the year.

The Prime Minister, Rishi Sunak, has pledged to halve inflation this year.

Cost of living

The rise in rates adds to the pressure on households already struggling with the cost of living. Charities report rising demand for food banks, and many families are cutting back on spending.

Some economists believe rates are close to their peak, but the Bank has warned that further rises may be needed.