Bank of England Interest rate rises to 0.75% – industry reaction

The Bank of England (BoE) has raised interest rates from 0.5% to 0.75% as it looks to tackle soaring inflation, which has hit a three-decade high of 5.5% and is set to climb higher still.

The rate increase,  the third in four months, takes rates to the highest level since March 2020. The Bank has warned that inflation is likely to reach 8% in April and possibly higher in the coming months, saying that Russia’s invasion of Ukraine has led to large increases in energy and other commodity prices and is “likely to exacerbate global supply chain disruptions.

The BoE’s Monetary Policy Committee (MPC), which voted by eight to one in favour of the increase, said more interest rate rises ‘might be appropriate in coming months, but there were risks on both sides of that judgement depending on how medium-term prospects evolved.’

Several banks yesterday moved to increase mortgage rates after the announcement, Lloyds Bank said customers on tracker mortgages would pay 0.25 percentage points more, adding that it is assessing what the Bank Rate increase will mean for customers on variable mortgage deals.

Santander said its standard variable rate would rise in line with the Bank of England’s increase to 4.9% from May, while Barclays said its standard variable rate would increase by 0.25 percentage points, from 4.99% to 5.24%.

Yorkshire Building Society also announced its mortgage rates will increase, saying that while it protected its mortgage customers from higher bills after the two previous interest rate increases, it has now been left with no choice but to pass on the cost. In regard to the impact of the interest rate increase on savings,

Commenting on the announcement Paul Broadhead, Head of Mortgage and Housing Policy at the BSA said “Given the rising costs of living, including the increase in the energy price cap, rising prices and the tax increases coming in next month, alongside the uncertainty the Russian invasion of Ukraine is causing, the Bank Rate increase will be unwelcome news for many. It is helpful that eight in ten mortgage holders are on a fixed rate as these people will continue to pay the same each month until their fixed rate period ends.  The 20% on variable rate mortgages are likely to see their payments rise, but whilst this is the third rate rise since December, the increase in their mortgage payments will be modest.”

“Lenders are sensitive to the rising number of people facing a squeezed household budget and we hope the Chancellor will provide some additional support to households in his Spring Statement next week. Anyone who is worried about their ability to pay their mortgage, particularly on top of energy and food price rises, should get in touch with their lender early.  Lenders will do everything possible to help.”

Paul Heywood, Chief Data & Analytics Officer at Equifax UK, said “This interest rate rise is a silver lining, albeit a threadbare one, for savers working out where to lock away money in the face of turbulent equity markets, but for those in debt it’s a double whammy; ballooning prices and now a likely increase to the cost of servicing any unfixed loans.”

“The cost of living crisis continues to put households under pressure across the UK as businesses and consumers alike feel the pinch of runaway energy costs and food prices. With inflation expected to reach over 7% by Spring, many billpayers are wisely budgeting ahead for eye-watering price increases.”

“Whichever way you look at it, inflation on this scale, especially on non-discretionary items such as food and utilities, means tens of thousands more people will struggle to balance the books, and many will fall into problem debt. Our data suggests that consumers in arrears on their credit card or motor finance repayments are already rising, and loan defaults are close behind. It’s at times like this that lenders, utility companies, telcos and other credit providers can go the extra mile for their customers by keeping a close eye on their customers’ repayment behaviours, and acting early to help those that show signs of being in difficulty.”

Martin McTague, National Chair of the Federation of Small Businesses (FSB) said “This move will mean higher debt costs for many firms at a moment when soaring overheads are threatening futures. The economic consequences of the pandemic are still being felt by small businesses, whose ability to make up for lost time and income has been undermined by a vicious cycle of rising costs.”

“A lot of small firms have had no choice but to increase prices in response, but this isn’t always an option, especially in sectors still trying to entice customers back, such as hospitality and tourism, and their suppliers.At the same time, consumer confidence has plunged and the cost-of-living squeeze has intensified, with record fuel prices and sky-high utility bills meaning loss of disposable income.”

“Small businesses increasingly feel that the Government is indifferent to the cost pressures they face. The planned hikes to national insurance and dividend taxation taking effect in a matter of days, alongside an income tax threshold freeze, will, for many, be the final straw.”

“Next week’s Spring Statement is the Government’s last chance saloon to mend relations. Increasing the Employment Allowance, upping the small business rates relief threshold on rates, and taking action on surging fuel and utility bills would all help.”

“‘Pay as you grow’ options to spread the pressure of debt repayments should be opened up to users of other state-backed loan schemes beyond just bounce-backs. We urgently need to see the Chancellor ease the pressure on the five and a half million small firms and sole traders on which our recovery will depend.”

Tommaso Aquilante, UK Lead Economist at Dun & Bradstreet said “In light of the current global economic turmoil, and the pressure this puts on prices, the Bank of England (BoE) has raised UK interest rates for the third time in a row. The future was looking somewhat brighter for the UK economy earlier this year. However, the economic outlook has deteriorated fast over the last weeks: in the coming months, businesses will have to deal with lower-than-expected growth, and higher-than-expected inflation as well as further supply-chain disruptions that will add pressure on already-stretched production chains.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “Rising rates bring bad news for borrowers. We’ve got used to bargain basement borrowing over the past few years, so we’re going to have to adjust to paying more on our debts.”

“Our mortgages are protected to a large extent by the fact that most of us are on fixed rate deals. New borrowers have also been sheltered from the full impact of the rate rise, because the high street banks are still sitting on such a cushion of cash that they can afford to offer exceptionally cheap deals. However, new rates are starting to creep up, and in February, Moneyfacts put the average two-year deal at 2.44% – up from 2.38% in January but down from a year earlier.”

“Meanwhile, anyone on a tracker or standard variable rate has been hit hard. The average SVR jumped 0.15 percentage points in March to an eye-watering 4.61%. It means that it’s well worth considering fixing your rate sooner rather than later if it makes sense for your circumstances.”

“Today’s rate rise will feed into the cost of credit cards, both on existing cards and on new ones, because we always tend to get a round of rate increases when the Bank of England makes a move. After February’s announcement, we had a flood of new cards at higher rates, and Moneyfacts figures show that the average credit card rate jumped to 26.3% in the first quarter.”

“Overdrafts are largely divorced from the Bank of England rate so they haven’t risen since the Bank of England started hiking rates: they’re so much higher that even if they crept up with rates it would be a drop in the ocean compared to what you’re already paying.”

Tony Syme, Macroeconomic Expert from the University of Salford Business School said “As the Bank of England say, ‘higher interest rates makes borrowing more expensive and it encourages saving’. That reduces how much people spend overall. And this will help to keep inflation down”. But the decline in real wages and increasing pressure on household budgets is already reducing how much people spend anyway.”

“The issues in the labour market should be the focus of government policy. For the Bank of England, they should take their lead from A.A. Milne: “doing nothing often leads to the very best of something. There are clear signals that there will be several more interest rate rises this year. The policy is designed to limit inflation which reached a 30-year high in January at 5.5%.”

“But there is an inherent flaw within this policy. As the Bank of England say themselves, “higher interest rates don’t work straight away.” They take time to take full effect. So when we use them, we always look at what will happen in the economy in one or two years’ time, not just what’s happening now”. And yet the same statement also says that “most of the current causes of the current high rate of inflation won’t last” and “we expect it [inflation] to be much closer to our 2% target in two years’ time”.

“The rate of increase in energy bills and petrol should certainly slow over the next two years, but there will be a ratchet effect. Whenever world oil prices go up, there is a corresponding rise in prices at the petrol pump. But we never see the same reduction in prices when world oil prices fall.”