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Bank Of England Keep Interest Rates at 0.1%

Despite climbing inflation, the Bank of England has decided to hold Interest Rates at their record low level in their latest vote.


This is despite the bank expecting inflation to peak to around 5% by April 2022, and for it not to reduce to the self imposed 2% target by the end of 2023 at the earliest


The bank's rationale is centered around continued uncertainty in supply chain, weaker than expected growth and lack of clear data yet on the labour market and the impact of the end of the Job Retention scheme.


However they have forecast rates may start to increase soon having "judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the two per cent inflation target sustainably in the medium term".


Earlier today, the US Federal Reserve said it too would not rush to reduce interest rates, however has announced a tapering of it's pandemic stimulus.


Why it matters?


These interest rate decisions do have consequences for businesses, and increasingly so given the current climate.


Low rates generally discourage saving and encourage cheap borrowing and therefore spending - the idea being this maintains and indeed encourages growth. However with energy prices surging, housing demand and supply chain disruption, we are seeing every increasing prices - inflation. The primary way of controlling this is to increase interest rates - this increases the cost of borrowing, cuts spending, encourages saving and thus cuts demand in the market, thus reducing these price increases.


Additionally changes in interest rates can greatly affect a country's relative currency valuation. Higher interest rates lead to an increase in the demand for a country's financial assets, and therefore an increase in the demand for a currency. Lower interest rates reduce speculative demand for assets and reduce demand for a currency. So the Bank of England's decision to keep rates on hold at 0.1%, has seen the value of the GBP fall today against major currencies - meaning buying goods from abroad has become relatively more expensive.