The Bank of England has increased the base rate to its highest level since the 2008 financial crisis
The Bank of England has hiked interest rates again. The base rate now stands at 5%, increasing by a whopping 0.5 percentage points in its 13th consecutive rise. Interest rates are now at a 15-year high as the Bank of England looks to stem rising inflation and combat the cost of living crisis. In order to drag inflation down quickly, the most commonly used policy tool used by the central bank is increasing the base interest rate. Increased interest rates are designed reduce demand from people to borrow money by raising the charges. The aim is to encourage people to save their cash. Inflation remains sat an 8.7% high, according to the latest figures by the Office for National Statistics, despite economists hope it would fall and offer relief for households.
In response to the rising interest rates, Chancellor of the Exchequer Jeremy Hunt said: “High inflation is a destabilising force eating into pay cheques and slowing growth. Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down. Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.” Higher interest rates will benefit those saving money, but will cause a dent for borrowers – especially when mortgage holders are facing share increase in costs. More than a million mortgage holders whose fixed-interest rate deals are set to expire soon will face a surge in their monthly bills, piling further pressure on already-stretched household finances.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said: “The Bank of England is doubling down on its fight against rising prices after red-hot inflation and wage data recently. It has faced increased scrutiny and pressure on its ability to bring down inflation as well as doubts around its forecasting credentials. Today’s hike is a desperate move to show markets it is highly committed to its mandate despite the financial pain inflicted.” Fiona Cincotta, senior financial markets analyst at City Index, said: “This was the first jumbo rate hike from the Bank of England since February and came despite the market only pricing in a 40% probability of such a large move.
“After yesterday’s inflation shock, with core inflation showing that it still hasn’t peaked [core inflation rose from 6.8% to 7.1% in May], the central bank felt it needed to act aggressively to show that it is serious about fighting inflation. I think there was a fear among policymakers that if they didn’t go big, the price/wage spiral could strengthen.”Adam French, senior editor at NerdWallet UK, described the rising interest rates as a ‘ticking financial time bomb’ for those due to remortgage their properties over the next few years. It is thought that over 500,000 mortgage holders will come to the end of fixed-rate deals during the remainder of 2023.
“The other problem is that there are no guarantees that rates won’t rise again in the coming months,” Mr French said. “It’s likely many are doing it already, but budgeting carefully and planning ahead financially remains key. Those with a fixed rate mortgage are mercifully protected from rate increases during the fixed-rate period of their mortgage product, but these rate rises are a ticking financial time bomb for the millions due to remortgage over the next couple of years who will likely find the rates on offer are substantially higher than they are used to.”
“If your mortgage is up for renewal in the next six months to a year it is a good idea to discuss your options with a whole-of-market broker sooner rather than later, and aim to have a plan in place before your fixed rate deal comes to an end so you can gauge what your future mortgage commitments are likely to be. They can help you consider ways to approach the end of your deal, with some lenders allowing you to book a new rate up to six months in advance of your current mortgage ending”.