The Monetary Policy Committee (MPC) was widely expected to hike the base rate following yesterday’s inflation figures, although this is a bigger hike than many forecasters expected. The Consumer Prices Index (CPI) rose by 8.7% for the 12 months to May 2023, defying expectations for a fall.
The MPC voted by a majority of 7–2 to increase the base rate by 0.5 percentage points, to 5%. Two members preferred to maintain the rate at 4.5%.
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The Bank has been aggressively hiking interest rates for over a year as it tries to get inflation back to its target of 2% – a task that has been complicated by record food prices and high energy costs.
According to the notes of the MPC meeting, the reason for the big hike in the base rate is because inflation in the services sector has remained persistently high, while wages are growing faster than it had predicted back in May.
It said the impact of “external cost shocks on inflation in wages and domestic prices may take longer to unwind than they did to emerge”.
Chancellor Jeremy Hunt said of the announcement to push rates up to 5%: “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.”
The increase in interest rates will bring further misery to homeowners on tracker mortgages and those about to remortgage, but it could benefit savers.
WHY IS THE BANK OF ENGLAND RAISING INTEREST RATES?
The rate of CPI inflation continues to be very sticky: it was 8.7% in the year to April, and again in the year to May. Experts had expected inflation to fall.
It means that inflation is currently over four times the Bank’s 2% target.
Raising interest rates is one of the tools that the Bank uses to try and bring inflation down. The idea is that increasing rates makes it more expensive to borrow money, meaning people have less to spend, and so reducing demand and therefore easing price rises. It had been anticipated that the Bank would raise rates to either 4.75% or 5% today.
Capital Economics previously said: “We expect the MPC to raise interest rates by 50 basis points to 5% at their meeting.”
The consultancy explained that while CPI inflation was unchanged at 8.7%, “the bigger concern in our view is that core inflation rose yet again, hitting a 31-year high of 7.1%. This marks the UK out from other advanced economies, including the eurozone and the US, where core inflation has started to fall.”
Giles Coghlan, chief market analyst at HYCM Capital Markets, adds: “The stakes have never been higher for Bank of England policymakers. Yesterday's news that core inflation has risen to the highest level since John Major was in Downing Street has delivered another blow to the economy, and with headline inflation remaining at 8.7%, a 50bps rise was necessary to avert further policy failure.”
WHAT IS THE OUTLOOK FOR INTEREST RATES?
Commentators expect that more rate rises could be on the way.
Daniel Casali, chief investment strategist at the wealth manager Evelyn Partners, said: “With inflation still elevated (albeit slowing) and a tight labour market to boot, the Bank may well continue to raise interest rates well into the latter part of 2023. Of course, much will depend on the incoming macro data before the MPC decides on whether to raise interest rates again. For the moment, expect sterling to continue to appreciate against a dollar that is weighted down by a Fed pause on interest rates, at least for now.”
The next interest rate announcement is due on 3 August.
WHAT DOES THE RATE RISE MEAN FOR HOMEOWNERS?
Another rise in interest rates spells bad news for those with mortgages and loans. There are more than 1.4 million people on tracker and variable-rate mortgage deals, and these people will often see an immediate increase in their monthly payments.
The increase in the base rate from 4.5% to 5% means those on a typical tracker or variable mortgage would pay about £64 more a month, based on a 75% loan-to-value on the average priced UK home, according to the credit broker TotallyMoney.
But those with high levels of borrowing of more than £200,000 would face an even bigger increase.
Homeowners who took out cheap fixed-rate deals years ago and will soon be remortgaging also face a sharp rise in repayments.
Eight out of 10 mortgage customers are on a fixed rate. The so-called "mortgage bomb" - with rocketing mortgage rates and a shrinking range of products to choose from - has become a huge issue. An average two-year fixed deal was 2.29% in November 2021, but is now 6.19%, according to Moneyfacts. The average five-year fixed rate is 5.82%.
WHAT DO INTEREST RATE HIKES MEAN FOR SAVERS?
An increase in the base rate is usually good news for savers. However, it’s unlikely banks and building societies will immediately raise savings rates. Instead, they tend to make ad-hoc changes.
Some savings providers have increased rates this week. Yesterday Marcus by Goldman Sachs raised the underlying interest rates on its Online Savings Account, Cash ISA and Maturity Saver from 3.14% to 3.39%.
Meanwhile, Nationwide is raising some of its savings rates by 0.1 percentage points on 1 July. For example, its Loyalty Saver, Loyalty ISA and Loyalty Single Access ISA accounts will see rates rise from 3.2% to 3.3%.
The best savings accounts are offering the most attractive rates in more than a decade, with savers able to earn 7% on a regular saver, 4% on an easy-access account, and 5.7% on a one-year bond.
Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.
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