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How high can interest rates go?

This does not constitute advice. Professional advice should be taken prior to acting on any part of it.Dental and Medical Financial Services Limited is an appointed representative of Best Practice IFA Group Limited, which is authorised and regulated by the Financial Conduct Authority.

For the third meeting in a row, the Bank of England’s (BoE) Monetary Policy Committee raised the Bank Rate. At the latest March meeting, the MPC raised the rate from 0.5% to the pre-pandemic level of 0.75%. 

The last time the committee raised rates at three successive meetings was when the committee first convened in 1997. This should shed some light on how most financial experts are feeling about the state of the economy. Inflation is a real concern – the current rate recorded in January is 5.5%, more than double the committee’s 2% target.

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Why are interest rates going up?

In an effort to manage the UK economy, there are a number of ways the Bank of England tries to influence changes. Adjusting interest rates is one such way. For the last decade or so, since the global financial crisis of 2008 in fact, UK interest rates have been historically low. Just before the coronavirus pandemic hit in March 2020, the rate was a mere 0.1%!

Low rates encourage companies and individuals to borrow and spend money in order to keep the economy ticking along. However, it’s hard to achieve the right balance because even though the Bank wants to support spending and growth, it also needs to make sure that this doesn’t lead to rising prices. So, to combat inflation from running rampant, the BoE might raise interest rates.

Looking ahead

Inflation is unfortunately on the rise. Even before the Russian invasion of Ukraine, inflation was on the up. But now that an energy crisis is pushing up wholesale energy prices, that cost has been passed on to consumers. And even though the rate is already at an astonishing 5.5%, policymakers expect it to hit 8% this quarter, a rate not seen since the early ‘90s. Many experts predict that it could go even higher before the year is out depending on both the containment of the coronavirus and the geopolitical climate. 

Despite the unemployment rate falling below 4%, the vacancy-to-unemployment ratio is at the highest level it’s been since 2001, when records began. As a result, underlying pay growth is running around 4-4.5%, a full percentage point above where it was running before the pandemic and it’s possible it could just keep rising. 

The base rate could climb to 2% this year

The March interest rate hike came sooner than expected and experts predict that before the end of the year, the base rate could climb to around 2%. As stated, higher energy costs will greatly impact the possibility of interest rate hikes as the BoE tries to keep inflation in check. It’s worth keeping abreast of the ever-evolving situation in Ukraine so you’re aware of how the economy might turn. 

While we expect the MPC to raise rates at least twice more to hit 1.25% in the coming months, policymakers will most likely assess the impact higher rates have had on the economy at that point. If inflation doesn’t run wild, it’s possible there could be no further increases for some time. But at this time, there’s no way to know for certain.

Professional advice to help you navigate your finances

As specialist mortgage providers and financial advisers to the medical and dental sectors, Dental & Medical Financial Services understand doctors’ unique requirements for their financial affairs. Consider a financial review with one of the experts to understand the full impact rising interest rates might have on you.

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