Interest Rate Rises March 2023

The Bank of England’s Monetary Policy Committee met at midday today and decided to raise interest rates for the eleventh time in 18 months – from 4% to 4.25%. The US central bank also raised interest rates on Wednesday by 0.25% despite fears about financial turmoil after several recent bank failures.

The rise follows a surprise jump in UK inflation last month to 10.4%, driven largely by salad and vegetable shortages. This keeps interest rates at their highest level for 14 years as the Bank seeks to tackle rising prices.

Putting up interest rates can mean people are more likely to save money and less likely to borrow. In theory, this means they have less money to spend so will buy fewer things, which should help stop prices rising as quickly.

The UK is affected by prices rising worldwide, so there is a limit to how effective rate rises can be.

The soaring cost of energy has been a key factor in driving inflation. Oil and gas were in greater demand as life got back to normal after Covid. At the same time, the war in Ukraine meant less was available from Russia, putting further pressure on prices. The war has also reduced the amount of grain available pushing up food prices.

This effect was compounded in the UK in February by a shortage of salad and other vegetables, which took food inflation to a 45-year high.

The Bank of England’s approach is similar to many other countries – Norway, the Philippines, Switzerland and Taiwan have also increased interest rates today – although the impacts are being felt to differing degrees. The current Eurozone interest rate set at 3.5%, whereas in Argentina inflation passed 100% last week, and interest rates there stand at 78%.