The Shock Factor

The Bank of England has raised UK interest rates to a 15-year high of 5% as it continues its battle against inflation.

Despite concerns that mortgage-holders face a timebomb of higher rates, the Bank's Monetary Policy Committee (MPC) decided to raise its benchmark rate from 4.5% to 5% last week, an increase of half a percentage point.

"An increase of 25 basis points had been priced into the market, so going up by 50 basis points was a little of a surprise," says Andrew Diver , Head of Taxation at Beatons Group. "The bank were too slow to increase rates initially, with the US Federal Reserve increasing rates quicker. Such a large leap at this time can only be for the shock factor, to put fear into individuals and the market to curb spending."

It is the 13th increase in UK interest rates in a row, going back to December 2021.

"Interest rate increases are a blunt instrument to curb demand because there are few people on variable rate mortgages, so any rate increase requires people to be coming off fixed term deals," Andrew continues. "It also has lesser effect on curbing spending by encouraging saving with increased interest rates possible.

"I would like to see the government doing more in respect of supply side economics.??Small steps were made in relaxation of pension lifetime allowances to increase the UK workforce but a more wholescale reform is required post Brexit to have a plentiful workforce which lessens the power of employees.?

"Currently with a lack of workers employees have the power to demand increases in pay because there is not a plentiful workforce to replace them, and as a result the increase in wages forces an increase in the sale price of the goods or services - and so the price spiral continues."