The Bank of England has raised interest rates for the 14th time in a row, increasing from 5% to 5.25%.

The aim is to control inflation – which has led to high price rises – but will mean higher rates on mortgages and loans as well as higher savings rates as households are put under further pressure. It follows a 0.5% rise in July.

The Bank of England hopes that people will spend less money by making borrowing more expensive, easing price rises – but rising rates too aggressively could cause the economy to slump.

The last time interest rates stood at 5.25% was 15 years ago in April 2008, during an economic recession.

“As if taken from a macroeconomics textbook from the 1950s, the Bank of England is adjusting the economy’s ‘thermostat’ and inflation will be controlled. But this is not the 1950s. It is not working,” says the University of Salford Business School’s Dr Tony Syme, a senior lecturer in economics and head of the finance and economics subject group.

“Even if today’s interest rate hike was effective, it would not bring inflation down next month. The issue is the ‘transmission mechanism’, the channels by which an increase in the Bank’s interest rate impacts the economy.

“According to their own research, when the Bank of England raises interest rates it takes nine quarters before the full effect on inflation is achieved. In other words, today’s interest rates will have its biggest impact on inflation in October 2025.

“And since that research was published in 1999, there has been wide acceptance that these time lags in monetary policy have only grown longer due to the rise of fixed-rate mortgages.”

He adds: “A recession is imminent… most deeply felt in Europe and North America. These are the regions in which central banks have raised interest rates month after month.

“Families will suffer the double pain of job losses and the continuing impact of these interest rate rises. That is a heavy price to pay for economic mismanagement.”

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Business concern

Dr Yi Ding, assistant professor of information systems at the Gillmore Centre for Financial Technology at Warwick University, says the news should be of concern to businesses.

“The rising rates will undoubtedly cause increased concerns for businesses which means support must be shown towards our innovation drivers, which includes investment and funding, to allow emerging technologies to develop at the speed needed,” she reflects.

“We must come together collectively, offering a collaborative approach from government, regulators, industry and academia to ensure this is top of the agenda for the UK to remain the go-to destination for FinTech development.”

Steven Mooney, CEO of FundMyPitch – which connects investors with businesses – also called for more support from the government and investment community.

“Entrepreneurs and SMEs will be feeling the effects of rising interest rates and as they continue to increase, further support must be provided to allow them to grow and support our economy,” he says. 

“Businesses should be receiving a mix of both government and investor support to help them through the turbulent times they have faced in recent times and funding must become a priority. 

“Small and medium businesses play a significant role in innovation, job opportunities and economic stability meaning there has not been a more vital time for support to be shown to help improve business confidence throughout the UK.”

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Supporting staff

It is high time that more businesses took measures to support staff struggling under the weight of the cost-of-living crisis, says Chieu Cao, CEO of Mintago, a financial wellbeing solution.

“Another interest rate hike, another sucker punch that will leave millions reeling,” he said. “We can be sure employers and managers are seeing the headlines about those drowning in skyrocketing debt and repayments, but how many have actually taken action to support their employees through these challenging times? 

“In fact, how many even know which of their staff are struggling with issues such as higher interest rates and the cost-of-living crisis?

“Unfortunately, too many businesses are not having the right conversations with staff – talking about financial stress remains a workplace taboo, and people’s wellbeing is being harmed as a result. But now is the time to step up. 

“There is no use pointing the finger of blame at the Bank of England, government, banks or anyone else. Business leaders must understand the critical role they can play in supporting employees at this time – prioritising financial wellbeing over other light-touch perks and benefits is a must in the current climate.”

Bank fail

Earlier this week the Financial Conduct Authority set out a 14-point action plan to ensure banks and building societies are passing on interest rate rises to savers appropriately, that they’re communicating with customers much more effectively and offering them better savings rate deals.

High street banks must also do more to increase the rate of interest accrued on people’s savings, says Lily Megson, policy director at My Pension Expert.

“Another interest rate hike means more pain for borrowers, but it ought to come as good news for savers. Yet ‘ought’ is the imperative word here,” she says. “Sadly, despite the Bank of England pushing the base rate higher and higher in its fight against inflation, many high street banks are continuing to fail to pass on these advantages to their customers. 

“This is deeply disappointing, adding to the financial strain on savers in the midst of a cost-of-living crisis that is far from over.”

She adds: “Now more than ever, it is crucial for banks and the wider financial services industry to prioritise consumers’ interests and uphold regulatory, ethical and moral commitments to putting consumers first. By doing so, they can regain trust and contribute to a more stable financial landscape for everyone.”

Mohsin Rashid, CEO of retail loyalty app ZIPZERO, agrees.

“A core tenet in the BoE’s strategy – encouraging people to put money aside – is being criminally undermined by many banks which are failing to pass on rising rates to their customers,” he warns. “No increase in the base rate is worthwhile if consumers don’t see value in saving, though it is encouraging to see the regulators finally cracking down on this.

“Households understand that it is the BoE’s responsibility to control inflation. However, the other wing of the UK economic high command, the Treasury, must ask if it is right that the pain being felt is universal and consider what support it can offer to households which are most struggling.”

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