Page 22 - Budget Newsletter - March 2023

Interest rates: no longer flatlining

UK Bank (Base) rate since 2010

4.50

4.00

3.50

3.00

2.50
%
2.00

1.50

1.00

0.50

0.00

The Bank of England has increased its bank rate at ten consecutive meetings of the decision-making
Monetary Policy Committee (MPC), taking it from 0.1% in January 2021 to 4.0% now. How much
further the Bank will go and how long it will be before rates start to fall are both hot topics. On the
one hand, CPI inflation appears to have peaked, the economy is cooling and there are cracks
appearing in global banking. On the other hand, core inflation, which strips out the volatile
components of food, energy, alcohol and tobacco, is ‘sticky’ and earnings growth (6.5% in
November 2022-January 2023) is too high to be compatible with the Bank’s 2.0% inflation target.

Last month the main UK banks were lambasted by the Treasury Select Committee for their tardiness
in passing bank rate rises on to their depositors, as opposed to the borrowers. NS&I has been
quicker off the mark than many, probably because the Government has plenty of borrowing to do.
The NS&I Income Bond now pays 2.85%, which compares unusually well with the best instant access
rates in the open market, mostly around 3.1%. Sadly, all these rates are well below current inflation,
so in real (inflation-adjusted) terms deposits will continue to lose investors’ money in the short
term.

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