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Quantitative Tightening and Rate Rises

Explain why the rate rises of 2021 to 2023 reached mortgage holders slowly and who felt them most, why each rise raised the government's own bill at once, and how the Bank shrank its gilt holdings while Bank Rate did the tightening.

Before you start

What you'll be able to answer

  1. Why did the rate rises take time to reach mortgage holders, and who felt them most?
  2. Why did each rise in Bank Rate raise the government's own bill straight away?
  3. How did the Bank shrink its gilt holdings while Bank Rate did the tightening?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

In December 2021 the Bank raised Bank Rate for the first time since August 2018

In November 2021 consumer prices were 5.1 per cent higher than a year before. Bank Rate, the Bank of England's own interest rate, was 0.1 per cent, and the Bank still held the government bonds (gilts) it had bought through quantitative easing. On 15 December its Monetary Policy Committee voted by eight to one to raise Bank Rate to 0.25 per cent. It was the first of a run of rises.

Predict first

From that starting point, how high do you think the Committee had taken Bank Rate by August 2023?

Bank Rate rose fourteen times in a row

Inflation went on rising, and the Committee raised Bank Rate at every meeting from December 2021 to August 2023, fourteen rises in a row. By August 2023 Bank Rate was 5.25 per cent, the highest since 2008. Each rise passed through to the rates banks charged on new loans and mortgages. Dearer borrowing was meant to slow spending and so bring inflation back towards the target. The chart shows Bank Rate from 2020 to 2026.

Bank Rate, 2020 to 2026Bank of England Bank Rate at the end of each month, per cent
01234562020202120222023202420252026First risePeakFirst cut

Source: Bank of England Database, Official Bank Rate (IUDBEDR). Open Government Licence v3.0.

Predict first

The rises pushed up mortgage repayments. As a share of their income, which mortgage holders do you think would be hit hardest?

Mortgage holders felt the rises as their fixed-rate deals ended

Many mortgage holders had fixed their rate, so a rise reached them only when their deal ended and they borrowed again at a higher rate. The Resolution Foundation, a research body that studies living standards, estimated in July 2023 that only about 56 per cent of households with a mortgage would have been affected by the end of June 2023.

On its projection, almost all would be on a higher rate by the end of 2026, paying about £2,000 a year more on average than in December 2021. The extra repayments would take around 6 per cent of income from mortgage holders in the second-poorest fifth of households, against 3 per cent in the richest fifth, because those on lower incomes who have a mortgage already spend a larger share of their income on repayments, so the same rise in rates takes a bigger share of what they earn.