The Bank of England has increased interest rates by 0.25% to 1%, the highest level seen since February 2009.
The move was widely expected as the Central Bank tries to combat surging inflation and the ongoing cost of living crisis.
Inflation currently stands at 7%, the highest level seen since 1992 – driven by record petrol prices and rising gas and electricity costs exacerbated by Russia’s war in Ukraine.
Experts have warned that inflation could peak at 10% later this year, five times the Bank’s 2% target.
Central Banks around the world are also raising rates as they try to combat inflation. Yesterday the Fed in the US increased its rates by 0.5% – the largest rise in the States since 2000 and following on from a 0.25% increase in March.
The BoE’s increase to 1% has also opened the door to the Bank selling down some of its £875bn portfolio of UK government bonds built up through its quantitative easing stimulus programme.
However, with heightened volatility in financial markets over recent weeks, analysts said the Bank would probably lay the ground for future asset sales rather than take immediate action, although disposals of £5bn a month could be made from as early as the summer.
The next decision on interest rates is scheduled for Thursday 16th June.
Reaction
Simon Webb, managing director of capital markets and finance at LiveMore:
“With the steep rise in inflation, we can expect further base rate increases this year so new borrowers and those remortgaging will find themselves with higher mortgage payments. With this in mind, there has never been a better time for borrowers to take out a longer-term fixed rate mortgage. This will give them peace of mind that their monthly payments will remain the same for the long-term fixed period they choose.”
Richard Pike, sales director at Phoebus Software:
“Another base rate rise will mean lenders having to update their systems again and send out letters to borrowers who are on variable rate mortgages. This will apply to around one in five borrowers as most people have fixed rate deals but that still represents around 800,000 mortgages.
“However, for those due to remortgage, they may well find themselves having to take a higher rate. Brokers could be approaching their clients earlier and advising them to apply for a new fixed rate which will be valid for three or six months, depending on the lender. By locking into a lower rate now rather than waiting to apply when their current deal comes to an end, borrowers should end up with a better deal.”
Tomer Aboody, director of property lender MT Finance:
“This rate rise was fully anticipated by the markets due to the need to manage soaring inflation. It will help cap some excess spending by consumers, although many have been cutting back where they can in the face of rising bills and the wider cost of living.
“Mortgage pricing is edging upwards, but many lenders up until this point have not passed on previous rate rises in full due to a highly competitive market. If they want to attract business, they need to absorb some of the rate increases; the question is, how long will they be prepared to do this for.”
Alex Lyle, director of Richmond estate agency Antony Roberts:
“This latest increase in interest rates is unlikely to have a major impact on buyers, particularly not in our part of London.
“Continued lack of stock is more of an issue. At present, buyers are anxious, not so much about rising house prices or mortgage rates, but limited choice. Those buyers who need a mortgage appreciate that while rates are rising, they are still incredibly low.
“Having said that, these now regular increases to interest rates, the almost-weekly adjustment to mortgage rates and rise in the cost of living, will inevitably have an impact on the housing market sooner rather than later.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman:
“This rate rise has seemed almost inevitable for some time now, bearing in mind increases in the cost of living.
“For that reason, most of the people we are in touch with at the sharp end have almost built in the uplift into their calculations when making decisions about buying and selling property.
“Certainly, the overwhelming majority of existing homeowners are benefiting from fixed-rate mortgages and are not under immediate pressure to move products so would not be immediately affected.
“Of course, once again it’s first-time buyers who seem to be clobbered on all sides by rising rents, higher interest rates and more stringent lending criteria. Yet while they often come off worse, they are so vital to the successful operation of the housing market, not only at the bottom of the ladder but connected in chains right to the top.”
Colin Bell, co-founder and COO of Perenna:
“It’s not surprising that we’re seeing interest rates rise by a further 0.25% given the current rate of inflation standing at 7%. The rise will negatively impact those mortgages on a standard variable rate and other variable debt, meaning they will need to pay more each month, at a time when they are also having to combat rising energy, food and fuel prices. These interest rate rises are being drip fed out to avoid large shocks, but as we have seen they are now regular and likely to continue, the cumulative effects are starting to be felt.
“We’ve seen lenders pull 500 mortgage products from the market in March alone and average rates on two-year fixes reach seven-year highs. This is clearly having a detrimental impact on consumers’ ability to get onto the property market. Flexible long-term fixed rate mortgages can provide a solution to the problem, allowing individuals to better manage their monthly outgoings, while avoiding any unnecessary stress caused by multiple interest rate rises.”
John Phillips, national operations director at Just Mortgages:
“The increase in the base rate of 0.75% to 1% will not have come as a surprise to anyone as the Chancellor has warned that rates could hit 2.5% by the end of the year.
“However, coupled with the financial pressure of the cost-of-living crisis means that the pressure on household budgets is the greatest it has been for a decade.
“While consumers have little control over their energy bills, they do have the opportunity to secure long-term security in the form of a fixed rate mortgage. As a result, our network of mortgage advisers report that conversations with borrowers around longer-term fixed rates have never been higher.
“Although rate uncertainly has historically dampened mortgage borrowing, robust house prices and a move by many to adapt their working lives to be more home-based is sustaining the market.
“If base rate continues to rise, and mortgage deals become more expensive and elusive, the need for professional mortgage advice will be essential in helping consumers maintain a sustainable household budget going forward.”
Emily Penn, capital and investment director at LV=“
“The Bank of England’s decision to raise interest rates by 0.25% is what I expected. The BoE is having to strike a balancing act between managing economic growth and inflation a challenge it has not faced for many years.
“While an increased rate helps tackle inflation it hinders economic growth. We expect inflation to trend back down to towards target late in 2023 as the impacts of increased energy prices and the Covid recovery come out. There remains a risk of higher inflation becoming embedded and then the BoE will need to act more aggressively.”
Vikki Jefferies, proposition director, PRIMIS:
“The Bank of England has decided to yet again raise the base rate to its highest level in 13 years, as it seeks to tackle record inflation. It will come as no surprise that this decision has been made, with consumer price inflation hitting a 30-year high of 7% in March, and households continuing to struggle with soaring energy bills alongside broader increases in the price of goods and services.
“The continued rise in interest rates poses major questions for the millions of homeowners who have bought at rock bottom rates in recent years – especially those on a two-year fix, who could be in for a shock in the coming months. Brokers will now need to be more proactive than ever to secure the best outcomes for their customers. This is particularly the case for those who have complex financial situations, and brokers should act quickly to help these customers to find the most appropriate and affordable products that fit their current circumstances.”
Nathan Emerson, CEO of Propertymark:
“Today’s rise is understandable from a wider economic point of view and considering where they have been they are still historically low. The concern around the recent rises are that they are coupled with high house prices. However, house prices have only risen at such a rate as buyers have been prepared to pay over the marketed price to secure a home above others.
“Whilst this competition is cooling down in some areas it is still present with large amounts of people wanting to move. We don’t anticipate this demand will be watered down but what those movers are able to pay will certainly start to be reconsidered over the coming months.”
Damien Druce, commercial director, Black & White Bridging:
“As per my comments in February this year I stand by my belief that this further rise in interest rates was needed.”
“The prospect of reccession will be daunting for families and businesses alike, so the BoE need to take all of the steps they can to manage the impact of this. “
“Furthermore we still have aggressive inflation which also needs addressing to ease the now obvious cost of living crisis. With so many headwinds facing economies around the world, central banks must act to combat this.”
“I remain optimistic the housing market will continue the trend of being resiliant to economic factors, but it will require decisive action from the BoE and appropriate Government policy/support for this to remain the case.”
Zena West, a glass artist at Nottinghamshire-based West Art And Glass:
“With interest rates and inflation rising, I have gone into survival mode. I am hoping I manage to weather what is looking to be a very long storm ahead. The cost of electricity, raw materials, travel and postage costs have all gone up, as well as food, and now higher interest rates are adding to the pressure. I’ve resisted raising my prices for now amid the cost of living crisis, but it is inevitable. I’ve also had to stop investing in my business or expanding my range, as money won’t allow it. Where is the Government support for the small businesses that are the bedrock of the economy?”
Jamie Rackham, founder of UK Facebook group, Not on Amazon, which has 193k members:
“Interest rates rising and the cost of living crisis are crippling millions of people and small independent businesses. It’s a nightmare scenario. A lot of people feel abandoned by the Government, which is doing next to nothing to support them while letting huge corporations avoid paying the taxes they should. Interest rates are rising and the price of everything is on the way up, and meanwhile the government is asleep at the wheel. The post-pandemic financial crisis, where the cost of pretty much everything is rising, has got the economy and millions of small businesses in a headlock.”
Seena Gosrani, owner of London-based jeweller, Bottlebee:
“With interest rates and the cost of pretty much everything rising, the walls are closing in on small businesses. Compared to this time last year my sales have dipped. We were in Covid times last year and sales were steady so I can only put the dip down to soaring inflation and the terrible state of the economy. Consumers understandably don’t need handmade jewellery, they need heating and food. I myself am now spending more cautiously as I am unsure what future outgoings will be. I have to pass on any increase in supplier costs to the consumer, which clearly puts pressure on sales.”
Friday Lawrence at Forest of Dean-based Friday Lawrence Silverware:
“Interest rates are rising and there could be a long way to go yet given the extent to which inflation is out of control. The inflationary pressure on small businesses is proving unbearable for many and there’s no guarantee raising interest rates will alleviate it. The Government should be focused on supporting small businesses and households who are under a massive strain. Instead, billion pound companies announce huge profits and avoid tax. Until we tackle big business and start taxing the billionaires proportionately, things won’t get any better for us at the bottom. The economic system that the everyday business has to operate in is massively outdated and hugely biased towards the wealthy, especially under this Tory government.”
Jenny Blyth, owner of London-based Storm In A Teacup Gifts:
“Any interest rate rise will add to the extreme pressure people like me are facing. Small businesses like my own are currently stuck between a rock and a hard place. Rising costs and interest rates mean that if we want to keep any of the money we make, we need to raise our prices. But if we raise our prices, our customers will be even less likely to shop with us because they can’t afford to do so. The economy is “
Esme Marshwitch, owner of Alton-based glass artist, The Glassy Witch:
“I am being forced to rely more and more on credit than I want to. Interest rates going up will likely mean bigger bills on any debt, putting more pressure on my finances. And it goes without saying that we will see little, if any, uplift in savings interest. I
” simply can’t see how a recession can be avoided at this point, given the impact of the pandemic and the added costs that Brexit has created. And all this time, our ministers have for the most part been feathering their own, their families’ and friends’ nests. The massive expenses claims that many MPs make, while their constituents have to decide whether to pay rent, utility bills, transport costs to get to work, or buy food, are a disgrace. Our government has zero interest in the public good. They have proven this time and time again, with their lies, their dodgy deals and their complete refusal to take responsibility for their actions.”
Natalie Ward, Managing Director at clothing and sportswear retailer, Latched:
“I have no confidence in the economy right now and interest rates rising feels like another blow. My sales have taken a huge hit since February. With rising costs, comes consumer caution. People are spending less just as small businesses are having to spend more across the board and it’s a scary time right now.
“I am personally in the process of applying for a part-time job to ensure I can afford to pay my own bills because my forecasts show there isn’t going to be enough money in the business to pay myself in the months ahead. The government is trying to claw back the billions spent on the pandemic and I understand that, but it’s going to be at the expense of small businesses and unfortunately I predict a huge surge in unemployment come the winter.”
Keith Budden, MD at Hampshire-based IT security firm, Ensurety:
“The economy is rolling downhill towards recession and rate rises, which in theory will help curb inflation, could be coming too late. The Bank of England seems to be playing catch-up with inflation, and is now noticeably behind the curve. The Government needs to do a lot more to help the lower earners cope with rising rates and inflation, and they should impose a cost ceiling on energy costs for SMEs. It’s absolutely brutal out there.”
Maddy Alexander-Grout, CEO of the Southampton-based money-saving app, My VIP Rewards:
“This is the worst state the economy has been in for decades. I’m a money saving specialist and even I am struggling to make ends meet. The Government needs to wake up and act quickly because it’s massively underestimating the scale of the crisis we’re in. It’s asleep at the wheel. Interest rates need to rise to contain inflation, but it’s another massive blow to households and businesses around the UK.”
Paul Young, co-owner at Carmarthen-based wellbeing website, Spiffy – The Happiness Shop:
“This isn’t just a financial crisis, this is a mental health crisis, too. A lack of financial security can be devastating to your mental wellbeing, and rising interest rates, coupled with skyrocketing costs, are causing a lot of stress.
“Our online store is dedicated to mental health resources and April’s sales are down by 85% compared to last year, because people are having to prioritise survival over their wellbeing. We’re a living wage employer and every one in our team is living month-to-month and cutting back on tiny luxuries just to get by. We’ve had to close our bricks and mortar show as the town has been decimated by Covid closures. There needs to be change on a political level, because I dread to think what the next few months hold for us all.”
Paul Johnson, head of mortgages at St. James’s Place:
“As interest rates continue to increase, anyone buying a property will see a direct impact on the amount they can borrow. However, a far greater impact is likely to be seen from the increase in the cost of living, as this is stopping mortgage companies lending as much as they were previously.
“Lenders are having to build in the increased costs of food and fuel into their affordability calculations. Buyers need to ensure not just that they can afford monthly mortgage payments and the associated bills, but that it is genuinely the best time for them to buy and not speculate on the property market. Interest rates look set to continue to rise, so fixed rates with payment security will prevent those with mortgages suffering the impact of further fluctuations.
Steve Seal, CEO, Bluestone Mortgages:
“Despite ongoing inflationary pressures, today’s decision will be a huge blow to consumers and borrowers across the country, many of whom have already been feeling the squeeze on their personal finances. This rate rise will no doubt put further pressure on these individuals.
“However, would-be and existing borrowers should remember that hope is not lost, and this is where the value of advice is paramount. Brokers, now more than ever, have a vital role to play in demonstrating the routes to homeownership and solutions available to meet their needs. Whether that be locking in a fixed-rate mortgage, remortgaging, or signposting consumers to a lender who can meet their circumstances, these professionals are on hand to help people make their homeownership dreams a reality.”
“The property market still hasn’t seen a major slowdown, with demand still outstripping supply, but if interest rates and mortgage companies’ affordability requirements continue to increase we will ultimately see a fall in property prices.”
Adrian Anderson, director of property finance specialists, Anderson Harris
“With the Bank of England raising interest rates once again today to 1%, the highest level in 13 years, this is an attempt to tackle the crippling cost of living crisis gripping the UK. Like many banks around the world the Bank of England is attempting to slow down inflation which reached a 30 year high of 7% in March.
“With inflation so high many City economists are anticipating more increases. Three of the Bank of England Monetary Policy Committee members wanted a larger increase to 1.25% however, Governor Andrew Bailey recently noted that the Bank of England is walking a “narrow path” between growth and inflation. There are concerns that the soaring cost of living and higher borrowing costs due to the high inflation will damage consumer spending which may force the banks to reconsider future rate rises.
“Today’s Bank of England rate rise will not be welcomed by borrowers on variable rate mortgages as the cost of their mortgage will increase.
“The good news is that c.74% of UK homeowners have a fixed rate deal. These borrowers will not be affected today however it’s likely that the fixed rates available in the future will be more expensive hence anybody with a fixed rate which is ending shortly should shop around as soon as possible.”
