The Bank of England (BoE) has increased interest rates by 0.25% as it continues to try and drive down soaring inflation.
Yesterday the Federal Reserve increased rates in the US by 0.75% increase as Americans across the country continue to be hit by rising prices and shortages of key items.
At its May meeting, the BoE raised the base rate by 0.25% to 1%, the highest level for 13 years, and warned that the British economy risks falling into recession.
As such today’s move by the BoE was widely anticipated with the main question being around the size of the increase.
Forecasters were tipping a 0.25% hike to 1.25% in the build-up to today’s announcement.
The Monetary Policy Committee (MPC) voted 6-3 in favour of the rise.
The rise comes after inflation soared to a 40-year high of 9% annually in April as food and energy prices spiralled. And a report out today has warned that UK food price rises could hit 15% over summer.
The report from grocery trade body IGD suggests inflation will last at least until next summer but could persist beyond that as a result.
The BoE itself expects inflation to rise above 10% later this year. And the Organisation for Economic Co-operation and Development (OECD) has forecast that the UK will be the weakest G-7 economy next year, as higher interest rates, tax increases, reduced trade and soaring food and energy costs weigh on households.
The OECD projects that the British economy will grow by 3.6% this year before stagnating in 2023.
Reaction
Charles Calvert, managing director, Easy Mortgages:
“As expected, The Bank of England has increased the base rate again today after the Monetary Policy Committee voted in favour of another rise. This is the fifth time in quick succession. Many will say “too little, too late” but did Andrew Bailey really have other options? Could he have acted sooner and would it have made any difference?
“The War in Ukraine and Brexit are the main drivers for our current situation. Energy, Fuel and Food are all costing more which has spiralled inflation out of control. Yes, they (Bank of England) could have increased rates sooner but with all the outside factors now in force, we would still be where we are today. Also, with so many other costs increasing, it’s lucky we held onto such a low rate for as long as we did.
“This will mean immediate increases for those on Tracker mortgages and possibly a bit of a shock for clients remortgaging at the end of the current fixed rates. I would advise speaking to an advisor such as Easy Mortgages and possibly looking at a longer-term fixed rate moving forward.”
Emma Hollingworth, distribution director at MPowered Mortgages:
“Rate rises are now an established theme of this year – with the Bank of England continuing its efforts to temper the effects of inflation by raising the base rate for the fifth time in a row. This will likely have repercussions for borrowing rates, including mortgage rates.
“As we move forward, securing rates quickly, before they disappear and are replaced, is likely to become an increasingly important factor for homebuyers and those looking to remortgage.
“MPowered Mortgages has worked out that a homeowner could save over £2,000 over a 2-year period if they lock into a deal now versus at the end of the year assuming mortgage rates rise alongside the base rate by a further 0.5%.
“At MPowered Mortgages, we are focused on using AI to speed up and improve the mortgage process, giving consumers and brokers a smoother experience when it comes to getting a mortgage.
“This week, we have launched a range of cashback products in our prime residential mortgage range specifically aimed at reducing the overall cost of buying a home because every little helps. We are living through a period of economic uncertainty and making the homebuying process as smooth as possible, as well as supporting those looking to buy a home, has never been more important than it is now.”
Rachel Springall, finance expert at Moneyfacts.co.uk:
“Interest rates on savings accounts are on the rise, which is largely thanks to competition among challenger banks and building societies. Loyal savers may not be getting the best deal and could be missing out on a top rate if they fail to switch. Out of the biggest high street brands, some have passed on just 0.09% since December 2021 and none have passed on all four base rate rises, which equate to 0.90%.
“It can take a few months for savers to experience any benefit from a base rate rise, but since December 2021 the average easy access rate has increased 0.26%, so with this in mind, there is still room for improvement. There is no guarantee savers will benefit at all but should they see 0.25% passed onto them, it would mean receiving £50 more a year in interest based on a £20,000 investment.
“Savers would be wise to review the top rate tables as there have been notable improvements over the past few months. The best deals today may not have a very long shelf life and some may require certain eligibility criteria to be met. However, if savers are prepared to make the effort, they could stand to earn a much better return on their hard-earned cash than if they have their money stored with a big high street bank for convenience. The market is moving in a positive direction, so it will be interesting to see if more rises follow in the weeks to come.”
Steve Seal, CEO, Bluestone Mortgages:
“As the cost of living crisis continues to take its toll, today’s decision will no doubt come as a huge blow to consumers and borrowers across the country amidst the cost of living crisis, many of whom have already been feeling the squeeze on their personal finances. This rate rise will certainly put further pressure on these individuals and affordability concerns will continue to be a key challenge for consumers over the coming months.
“However, we must remember that rates remain low when compared to historical averages, and that not all hope is lost for would-be and existing borrowers. This is where the value of advice is paramount. Brokers, now more than ever, have a vital role to play in demonstrating the plethora of options available on the market that can pave the way to homeownership, and how these solutions can be tailored to an individual’s unique circumstances.”
Colin Bell, co-founder and COO of new lender Perenna:
“Regrettably, recent incremental base rate hikes have so far had little impact in curbing rocketing inflation. Pressure for a larger base rate hike has also been mounting for weeks, but this would be nothing but damaging to first-time buyers, borrowers on tracker mortgages, and homeowners looking to remortgage.
“Interest rates are highly unpredictable and often stress-inducing. Consumers worried about today’s decision should certainly explore flexible long-term fixes as a way of dodging the rollercoaster of remortgaging or repaying debts in these highly uncertain conditions. Why gamble on highly unpredictable decisions when you can enjoy the certainty of fixed repayments, and safer financial planning?”
Vikki Jefferies, proposition director, PRIMIS:
“The latest base rate rise from the Bank of England will come as no surprise with inflation now at its highest level in 40-years. The rising cost of living, particularly with food and fuel prices increasing, means consumers will be looking for ways to reduce costs and manage their monthly outgoings.
“Brokers will therefore need to be more proactive to secure the best outcomes for their clients. In an increasingly complex mortgage market – one where lenders are reducing the number of products they offer – their support is vital in helping borrowers who need to consolidate debt or remortgage.
“During these uncertain times, advisers will need to draw on a wealth of resources and have access to a broad range of products to help their clients. Those that are part of a network will have an abundance of support available to them to help them meet the changing needs of their clients.”
Paul McGerrigan, CEO at fintech brokerage Loan.co.uk:
“Another rate rise unfortunately adds to the feeling of negativity across the UK, without having any real impact on inflation.
“It puts a percentage of homeowners (those not in fixed mortgages) under immediate budgetary pressure. Many people are not overspending on luxuries. They are dealing with an increase in the essential costs of food, energy and fuel caused mainly by the war and related global supply issues. This is the main driver of high inflation.
“Sadly, the MPC has only one extremely limited tool and they continue to use it whether it works or not. It’s like putting up an umbrella in a hurricane. Borrowers need some good news to maintain stable levels of output.”
Kevin Webb, managing director, Legal & General Surveying Services:
“The Bank of England’s latest decision to raise the base rate will have an impact on the UK property market. Repayments will rise for those on tracker mortgages and others who need to find a new fixed rate product.
“A rise in rates could also threaten to put the brakes on the housing market’s growth, as prospective homeowners trying to step onto the ladder decide instead to hold off buying and try to balance the books during a time when the cost of living is going up.
“For those planning to buy a home, it is likely to be the single biggest transaction they make during their lifetime, and they will naturally want to ensure they are as comfortable as they can be when making the purchase. Today’s news makes it all the more important to seek the expertise of surveyors, who can give immense value and reassurance to homebuyers.”
Conor Murphy, CEO at Smartr365:
“The knock-on effect of base rate rises on lending rates, including mortgage rates, has been well-documented this year, in a trend looking to continue following today’s decision.
“With demand still outweighing supply, the property market is seeing continued healthy levels of activity. As we move forwards, however, securing rates as quickly as possible before they move again is likely to become increasingly important for those looking to purchase.
“In this environment, ensuring a smooth and efficient mortgage journey is a growing priority and investing in mortgage technology should be front and centre for brokers wishing to keep services levels high.
“Platforms that provide streamlined end-to-end purchasing processes designed to secure mortgages faster and with ease will be crucial to those looking to secure mortgages both quickly and safely.”
Karen Noye, mortgage expert at Quilter:
“The last time interest rates were above 1% was back in 2009 and Gordon Brown was trying to shore up the economy following the financial crisis. While we are now living in very different fiscal times, interest rates have once again risen past 1% and it could spell the start of a difficult period for the economy and particularly for house prices.
“People are already struggling due to the cost-of-living crisis and an increase in interest rates, and as a result mortgage rates, compounds the situation. Fortunately, the large majority of borrowers are on fixed rate deals so at least in the short term, they won’t see a change. However, when those deals come to an end a severe shock could be in store. Those on variable or tracker mortgages will already see their monthly payments increase.
“After today’s rise to 1.25%, someone with a mortgage worth £250,000 over 25 years would pay a monthly payment of roughly £970. If interest rates climb to 2% monthly payments would soar to £1,059, a huge £89 difference. With energy and food prices climbing too, this could spell disastrous news for families up and down the country.
“Further rate hikes are certainly not out of the question, and this could start to impact house prices. The housing market is already showing signs of a slowdown and how well it can weather further rate rises, alongside raging inflation, is yet to be seen but the prognosis is not good.
“However, at present there continues to be very little stock on the market, which will keep prices high. But, because there has been such a long period of ultra-low interest rates, many may suddenly struggle to meet their monthly payments. Lenders since the financial crash have had to do much more rigorous affordability stress tests on borrowers but the current fiscal climate could still derail some homeowners or at least make them think it might be better to downsize to lower monthly outgoings. This will bring more properties to market and the laws of supply and demand dictate that that could mean we see house prices at the very least stall if not cool down.
“Once again, the biggest losers are first time buyers. They face a steep uphill battle to get on the housing ladder having to contend with rising interest rates, which make mortgages less affordable, inflation eating away at their deposits and the rest of the cost-of-living pressures. With wages failing to keep up with runaway house prices this is likely to be one of the most difficult times in the last few decades, if not longer, to be trying to get your foot on the housing ladder.”
Simon McCulloch, chief commercial & growth officer at Smoove:
“The BoE decision to increase interest rates by 0.25% to 1.25% today may lead to another rush in homeowners trying to remortgage before rates become even higher.
“According to our data, remortgage cases in May, when the Bank of England previously raised rates, were up 43% year-on-year, and remortgaging made up almost two-fifths (39%) of conveyancing cases for the month.* Whilst the rates continue to rise, we should expect a busy time ahead for mortgage brokers and the legal profession as individuals look to refinancing.”
Paul Broadhead, head of mortgage and housing policy at the BSA:
“Another Bank Rate rise, the fifth since December, will be very unwelcome news for many homeowners. With around eight in ten mortgage holders on fixed rates it will take time for these rises to be felt by most borrowers, as they will continue to pay the same each month until their current deal ends.
“The financial impact of re-mortgaging could be less than people expect, although I appreciate that any increase in monthly expenditure given the rising costs of living will be unwelcome. It’s likely to cost those at the end of a 2-year fixed rate who re-mortgage to a new similar deal up to £80 more a month. For those on 5-year fixed rates, their re-mortgage is likely to increase their payments by nearer £35 a month.
“Lenders are sensitive to the rising number of people facing a squeezed household budget. Anyone who is worried about their ability to pay their mortgage should get in touch with their lender early. Lenders will do everything possible to help.”
Stuart Wilson, CEO of Air:
“Today’s interest rate rise of 1.25% marks the next instalment of the Bank of England’s attempts to counter rising inflation – now well above official targets, surpassing 9% in May. In the face of rising inflation and a steadily increasing base rate, older people – especially those on fixed incomes – are increasingly considering all their options.
“Indeed, more than 80,000 older homeowners chose to use equity release to boost their finances over the past two years and the sector is expected to continue to grow in 2022. That said, there are still many people who are not aware of the wide range of later life lending products available nor how flexibly they actually are.
“By starting conversations, advisers have the opportunity to play a crucial role in ensuring that their clients understand their options and take proactive steps to find the right product for their individual circumstances.”
Finn Houlihan, managing director at Arlo Group:
“As excepted, the Bank of England interest rate has increased by 0.25% to 1.25% this morning, despite calls for a larger increase to curb inflation. This is still an incremental increase since December when the rate was at its lowest ever level of 0.1%, and marks the highest the rate has been since the start of recession in 2009.
“Whilst the change is being implemented to mitigate the impact of inflation on households and businesses that are already struggling with an increased cost of living, higher rates continue to hit those on variable rate mortgages, not to mention those who are coming to the end of a fixed term with higher bills.
“Looking forward and, with Tuesday’s low unemployment data, it seems likely that the Bank of England will continue to raise rates to avoid another recession and consumers will be the ones to lose out.
“This is where professional financial advice will play a significant role as advisers can review their clients’ income and expenditure to help them mitigate the impact. The government’s cost-of-living package will help but people will need more support in evaluating whether they have enough disposable income, whether they can live comfortably on their pensions and savings when approaching retirement, and whether they need to reassess their financial situation.
“It is likely that we will see further interest rate rises in the future and there will be another energy price cap in October which will further impact finances. However, there are still areas where people can make money and it is an adviser’s role to make sure they are as tax efficient as possible.”
Simon Leadbetter, Global CEO of national estate agent group Fine & Country:
“The Bank of England has resisted pressure for a more aggressive hike and opted instead to maintain a steady-handed approach.
“It is likely that the overall impact of this rise on the housing market will be diluted by the levels of demand we are currently seeing, and different demographics will be affected disproportionately.
“Existing homeowners remain in a strong position to trade-up given the gains they have made in the boom, and current evidence suggests that previous hikes have done little to diminish their appetite for grander homes.
“Meanwhile struggling first-time buyers, who already face the greatest hurdles in the housing market, may find themselves trapped in expensive rentals for even longer as their affordability woes continue to worsen.
“With the economy already edging towards recession, many will be wondering whether further monetary tightening may create more problems than it ends up solving.”
Richard Pike, Phoebus Software sales and marketing director:
“Today’s increase is one that most people were expecting and, hopefully, preparing for.
“The thing to understand is that this is a global problem, just yesterday the US increased its interest rates by the biggest percentage in 30 years, we are not alone in having to deal with spiralling inflation. Covid and the war in Ukraine have both taken a huge toll and the knock on effect will be long lasting.
“In this rising inflation and interest environment, even though the increments are small, real wages are reportedly already struggling to keep pace. So it is inevitable that some households will be starting to feel the pinch.
“It is encouraging therefore, to read that the FCA has today reminded lenders of their responsibility to provide help to customers struggling with payments. However, this does of course mean that lenders will need the resources to identify vulnerable borrowers at an early stage to be able to offer the help that is required.”
Simon Webb, managing director of capital markets and finance at LiveMore:
“The Bank of England said in the past that when base rate starts to rise it would be gradual but five consecutive increases brings into stark reality the concerns within the wider economy.
“Mortgage payments are arguably the largest monthly cost for homeowners, so by fixing their mortgage they will know exactly how much they must pay for the term of their fixed rate period. Unlike the escalating costs of utilities bills and petrol, food and other essentials, knowing mortgage payments won’t go up will be some consolation to people’s budgets.
“We are seeing more lenders bringing in 10-year fixed rate mortgages and the rate is often similar or even slightly less than five-year products. As the cost of living continues to rise, to know you will be paying the same monthly payment over the next 10 years should bring some level of comfort.”
David Robinson, co-founder and chartered wealth manager at Wildcat Law:
“Thursday’s rate decision was symbolism at work. The fact that we had a 0.25% increase rather than a 0.5% hike is a sure sign that the Bank of England understands that this is all about appearing to have some level of control in an economic environment where they in fact have very little actual control.
“In predicting the economy will shrink by 0.3% in the second quarter, they are highlighting why they simply cannot afford to raise rates any faster. To do so will run the very real risk of stagflation. The figure everyone on both sides of the Atlantic will be looking at very nervously at the moment is the rate of unemployment. If that starts to tick up, things could deteriorate quickly.”
Lewis Shaw, founder of Mansfield-based Shaw Financial Services:
“The Bank of England has missed an open goal to increase bank rate by 0.5% after the US Fed raised its rate by 0.75%, instead opting for another marginal rise of 0.25%. If the pound weakens against the dollar, we could see the cost of imports rise, further exacerbating inflationary pressures and heaping misery upon woe.
“Assuming the Bank of England increases rates by 0.25% at each subsequent meeting this year, it would put the bank rate at 2.25% by Christmas. We’re quickly heading into dangerous territory with worries of wage-price spirals. The similarities with the 1970s are now painfully apparent.”
Fanny Snaith, a Cheltenham-based certified money coach:
“Will this latest rate rise filter through to savers or just hit borrowers? You suspect the latter. Rate rises continue to squeeze us harder and harder but as they have been at record lows for so long, and with inflation spiralling out of control, it is no surprise they are moving up. I fear for those whose mortgages are near review as they will feel a significant shock.”
Alastair Hoyne, managing director at London-based Finanze:
“A gradual increase in rates as we have had again has the opposite effect of what it’s intended to do, as inflation has more time to bite. If the Bank of England continues to raise rates slowly and incrementally, we will simply end ending up creating our own misery.”
Vadim Toader, CEO & co-founder of Proportunity:
“The announcement today that the Bank of England will raise the base rate by another 0.25%, bringing interest rates to a 13-year high of 1.25%, will come as disappointing news for many first-time buyers. With this announcement following in quick succession to the previous hike in May, those who have been trying to get on the property ladder now face yet another financial setback, as mortgages will be pushed even further out of their borrowing reach.
“As a result of these rising rates, and with the deadline for Help to Buy looming, first-time buyers may need to explore other lending options that can help them to increase their deposit and access better rates by lowering their loan to value.”
Brian Murphy, head of lending at Mortgage Advice Bureau:
“This now being the fifth consecutive rate rise by the Bank of England, all eyes will be watching how the property market responds.
“High interest rates, coupled with soaring inflation, will no doubt impact the cost of loans and put a further squeeze on what consumers can afford. Signs of a slight cooling market may emerge, but the reality remains that demand continues to outstrip supply, meaning that prices continue to be elevated.
“The Bank of England is predicting that inflation in the UK is likely to keep rising to around 10% this year, which could well mean interest rates will follow suit in their upward trajectory this year.
“Existing borrowers, especially those on tracker or variable rate mortgages, should consider moving onto a fixed rate as soon as possible to protect them from a high interest and inflationary environment. Speaking to a mortgage broker can also help advise you on what the best options are for your circumstances.”
