The Bank has raised rates for the 13th time in a row. The surprise jump from 4.5% to 5% aims to tackle inflation.
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 Monetary Policy Committee 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.
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 re-mortgage, 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.
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.
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%.
Article from Money Week