The Bank of England (BoE) has increased the Base Rate to 0.75%, the highest level since March 2020, despite the economic uncertainty created by Russia’s invasion of Ukraine.
The BoE’s nine-person Monetary Policy Committee (MPC) voted 8-1 in favour of the rise.
The move was widely anticipated with inflation hitting 5.5% in January, and likely to rise over 7% in April. As such the central bank is keen to keep inflation expectations in check by tightening policy.
The surge in oil and commodity prices following the Ukraine war has added to the inflationary pressure, and also darkened the UK’s economic outlook.
Yesterday the Federal Reserve raised US interest rates for the first time since cutting them to record lows in 2020.
The Fed is keen to get a grip on rising prices across the Atlantic, where US consumer prices have soared by 7.9% in the last year.
Before the Russian invasion of Ukraine, there had been speculation the BoE might be more aggressive with a half-point rise this month. However, global events saw the central bank take a less aggressive approach.
A statement from the Bank read: “Given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist, the Committee judges that an increase in Bank Rate of 0.25% is warranted.”
The next scheduled base rate decision is set for May.
Reaction
Steve Seal, CEO, Bluestone Mortgages:
“While today’s decision to raise rates is hardly surprising given current inflationary pressures, it will no doubt be difficult news for borrowers, many of whom are already feeling the squeeze on their personal finances.
“While this rate rise will inevitably impact mortgage repayments, there are still steps existing and would-be borrowers can take, whether that be locking in a fixed-rate mortgage or remortgaging.
“And for those who find themselves in a more challenging financial situation, it’s important to remember there are still lenders out there who can point them in the right direction and help them achieve their homeownership dream.”
Emma Hollingworth, distribution director, MPowered Mortgages:
“Today’s announcement that the Bank of England has decided to further raise the base rate to 0.75%, has certainly intensified the squeeze on household finances around the UK. This decision will come as no surprise, especially with inflation rising steadily. Last month, the central bank forecast that inflation will increase to 7.25% in April, but now many believe that levels could exceed this.
“As the cost of living continues to rise significantly, many households will find their finances squeezed even further. Those looking for a suitable and affordable mortgage product will need a quick and certain answer to what mortgages are available to them.”
Peter Lowman, Chief Investment Officer at London-based Investment Quorum: “This rate rise was as good as set in stone. With inflation predicted to move higher over the coming months, intensified by the rise in energy, commodity and food prices, the Bank of England’s hands were tied. While the Bank of England cannot do much about the supply chain conundrum or skyrocketing commodity prices, it does have the ability to raise interest rates and that’s exactly what it’s doing.”
Antonia Medlicott, Finance Editor at the financial comparison website, InvestingReviews.co.uk: “It was an odds-on certainty that the Bank of England would increase rates, as controlling inflation is its primary remit. Expect more rate rises in the months ahead as the inflationary storm grows.
“In theory, savers should rejoice but in practice inflation is so high that real returns are a pipe dream for anyone holding their money in cash. In recent months, we have seen a significant rise in the number of people researching investing platforms through our website.
“Savers who would traditionally avoid equities are increasingly turning to the stock market to give their money at least a chance to grow.”
Scott Gallacher, a Chartered Financial Planner at Leicestershire-based independent financial advisers, Rowley Turton: “Increasing interest rates to control inflation is the wrong policy at the wrong time.
“Current UK inflation is primarily being driven by external international factors such as rising gas and oil prices and Chinese supply issues due to Covid, so trying to dampen domestic demand, and therefore inflation, by increasing interest rates seems naive at best. The cost of living crisis will more than dampen UK consumer demand. And UK consumers don’t need a double whammy of rising mortgage payments and rising bills.”
Dominik Lipnicki, director of Your Mortgage Decisions: “There are specific reasons for the current inflation we’re seeing and the Bank of England raising the base rate will do very little to fix the problem.
“We have all seen huge energy price increases and more are yet to come. Coupled with the upcoming National Insurance hike, this means that many people will struggle and have to choose between heating and eating. By increasing their mortgage payments, this financial strain will only become more severe. We have a very tough year ahead and raising rates now is not the answer.”
Alastair Hoyne, managing director at Finanze:
“The Bank of England had to raise interest rates, even though it will apply even more pressure on households.
“Households are so leveraged that rate rises, even small ones, have the ability to cripple people financially. They’re hanging over the average household like the Sword of Damocles and the Monetary Policy Committee knows it. The Bank of England is in an almost impossible position.”
Scott Taylor-Barr of Shropshire-based broker, Carl Summers Financial Services:
“Energy price rises, fuel price rises, tax increases, food price rises, seemingly everything is on the way up. But the issue is that the biggest price increases are on essentials, not things we choose to buy.
“So is adding to what is widely touted as the biggest decrease in our standard of living for decades by increasing interest rates really that helpful?
“Inflation isn’t rising because we’re all feeling flush and spending our money on luxuries, it’s rising because the essentials of modern life are all skyrocketing. Increasing people’s mortgage payments isn’t going to bring down the price of petrol.”
Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning:
“This rate rise was always coming but too much tightening will lead to an even worse fate, namely recession. A further squeeze on the consumer just isn’t necessary right now in my view. Central Banks cannot say it out loud but this inflation is good for the debt on their balance sheets.”
Graham Cox, founder of the Bristol-based Self-Employed Mortgage Hub:
“As much as it adds to the existing pain, I do think we need to wean the economy off its dependence on ultra-low interest rates. Inflation is running riot and could remain high for a couple of years. It will cause huge damage to the economy if we’re not careful. I think we need to continue slowly raising the base rate and take the medicine now. Or we will be storing up far greater problems for later on.”
Dr Jackie Mulligan, expert on the Government’s High Streets Task Force and founder of the local shopping platform, ShopAppy:
“In theory, the Bank of England is doing the right thing by raising interest rates to control inflation, but equally doing it now when so many people and small businesses are already on the breadline and struggling to make ends meet feels like it is out of touch.
“People’s spending power has already been obliterated and the last thing we need for local high streets is customers and businesses having to deal with higher borrowing costs. For many small high street businesses already crippled with debt from the pandemic, rising interest rates could spell the end.”
Paul McGerrigan, CEO at national credit broker Loan.co.uk:
“The MPC is trying to stir the ocean with a teaspoon right now. In calmer times they of course would need to act decisively and raise rates to control rising inflation.
“The current economic waters are incredibly choppy and inflation is being driven by factors outside of consumer behaviour, driven mainly by events in Ukraine and the hangovers from Brexit and COVID.
“I understand they are looking to the future when the much larger portion of fixed rate borrowers’ deals expire but it’s a dangerous game to play.
“Consumers and the country are in for a rough ride as exceptional household energy and food price hikes loom large, which will bite deep into budgets from April 1 and this only adds to the pain.”
Karen Noye, mortgage expert at Quilter:
“With inflation spiking it’s no surprise that The Bank of England opted to raise interest rates today. While understandable, the increase deals yet another blow to generation rent.
“First-time buyers will be among the most heavily impacted by this further rate rise. To get onto the property ladder, first-time buyers often need to borrow the maximum amount available and are faced with higher interest rates as a result of high loan-to-value borrowing.
“This rate increase coupled with the rising cost of living means first-time buyers are faced with affordability problems that start to become insurmountable without significant help from Bank of Mum and Dad.
“The good news is that most borrowers are on fixed rates and therefore won’t feel the impact of a rate hike until their deal runs out but those looking to remortgage in the short term will certainly start to feel the pinch.
“Similarly, homeowners on a tracker mortgage based on the Bank of England’s base rate, or those on their mortgage provider’s Standard Variable Rate (SVR), will see a swift increase in their bills.
“However, lenders tend to price anticipated interest rate rises into their deals before any announcement, so prospective borrowers searching for deals are unlikely to see huge changes in what’s on offer following today’s news.
“This increase may also kibosh the ever-increasing house prices we have seen over the past few years.
“The race for space, the stamp duty holiday and lockdown savings all fed into creating an incredibly hot housing market. However, today’s news coupled with the economic uncertainty resulting from the war in Russia and the cost-of-living crisis are all likely to finally halt runaway house prices.”
Vikki Jefferies, proposition director, PRIMIS:
“It will come as no surprise that the Bank of England has decided to yet again raise the base rate. Inflation in the UK is at its highest level in 30 years, and many now believe that levels could surpass 7.5% in April.
“As the cost of living crisis continues and economic conditions remain volatile, lenders are beginning to act more cautiously in order to mitigate the risk of borrower defaults, namely by reducing the number of mortgage products they offer. Research from Moneyfacts shows that there are now 518 fewer products for borrowers to choose from today, compared to the start of February 2022.
“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.”
Adrian Anderson, director of property finance specialists, Anderson Harris:
As widely predicted the Bank of England have decided to increase the base rate from 0.50% to 0.75%. The base rate is now back at the pre pandemic level we saw in March 2020.
“This is now the third increase from the historic low rate of 0.10% in December 2021 with more increases expected during the year due to the high levels of inflation we are experiencing.
“Mortgage payments will increase for around two million households according to UK Finance and its likely mortgage lenders will continue to increase fixed rates which will be a shock to many households at a time when bills are increasing. We are in a very different place now to where we were only six months ago when fixed mortgage rates were the lowest on record.
“The Bank of England are attempting to calm the rise in the cost of living and do expect inflation to ‘fall back materially’ once prices stop rising however, we should expect rates to continue to rise in the meantime.”
