The Bank of England left the base rate unchanged at 0.25% in it’s May meeting, but warned that rising living costs and falling wages will mean “challenging” times for many households this year.
Members of the Bank’s Monetary Policy Committee, which sets interest rates, voted by 7-1 to keep rates the same, despite higher inflation.
Inflation has risen above the government’s 2% target as weaker sterling has started to feed through to consumer prices.
The Bank said it expects inflation to rise further above the target in the coming months, peaking a little below 3% in the final three months of the year. Falling unemployment should, however, help wage growth to recover over the same period, although much will depend on the success of the UK’s Brexit negotiations.
If talks go smoothly, the Bank indicated that it would be able to raise interest rates from their current low of 0.25%, and that this could potentially happen at a faster and sharper rate than currently anticipated.
When interest rates go up, borrowing becomes more expensive, which means consumers then have less money to spend. This in turn lowers inflation and helps slow the economy. When interest rates are very low, borrowing is cheaper which means consumers spend more, leading to rising inflation and stronger economic growth.
According to the minutes of the meeting, “it would take relatively little further upside news on the prospects for activity or inflation for [MPC members] to consider that a more immediate reduction in policy support might be warranted.”
However, it’s not thought than any increase is imminent. According to the National Institute of Economic and Social Research, the MPC may decide to “look through” temporary high inflation and hold interest rates at 0.25% until 2019.
Whilst the current low base rate is bad news for savers, homebuyers and those remortgaging are benefitting from some of the lowest mortgage rates ever seen. Many people are opting to fix their mortgage rates to provide them with peace of mind that their monthly payments won’t change when interest rates do start to rise, and this trend is expected to continue.
Interest rates left unchanged at 0.25%