Bank of England raises interest rate to 1% – Industry reaction

The Bank of England Monetary Policy Committee has raised rates to 1%, the highest in 13 years.

The Bank also warned that the cost of living crisis could push the economy into recession this year. The Bank’s Monetary Policy Committee (MPC) voted to raise the base rate from 0.75% to 1%. Three of the nine-strong MPC voted to raise rates further, calling for a 0.5% increase.

The Bank expects inflation, which currently stands at 7%, to hit 10.25% by the end of the year, far exceeding its 2% target. While officials do not expect two consecutive quarters of negative growth, they predict the economy will decline by 0.25% next year. It also warned that household disposable income is projected to fall by the second largest amount since records began in 1964 this year.

Commenting on the increase in the bank Rate from 0.75% to 1%, Paul Broadhead, Head of Mortgage and Housing Policy at the BSA said “Given the rising costs of living, alongside the uncertainty the Russian invasion of Ukraine is causing, the further Bank Rate rise 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 although this is the fourth rate rise since December the increase in their mortgage payments will be relatively modest.”

“Lenders are sensitive to the rising number of people facing a squeezed household budget. 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.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust said “Today’s rate rise, while small in scale, is a potential source of worry for people with significant amounts of borrowing, when taken in the context of rising costs across the board. Whilst the ongoing impact of higher inflation is likely to be felt much more strongly, we know that any small increase in costs can push households with stretched budgets into difficulty.”

“It is important that any increases in the cost of borrowing are not passed on to the many households already struggling to cover essential costs.”

“With no let-up in sight from rising energy, fuel and food prices, more support is needed now for the many households already caught at the sharp end of the cost of living crisis. Significantly uprating benefits would go a long way in helping people whose incomes are not keeping pace with rising costs, along with targeted support for those unable to afford their bills.”

StepChange Director of External Affairs Richard Lane said “The current level of support offered by Government, while welcome, falls short of what’s needed to mitigate the double whammy of rising inflation and interest rates the country now faces. The Treasury showed itself to be agile and reactive to the country’s financial challenges during the pandemic – it’s now time to display these same traits in response to a similarly dire situation. Measures including raising benefits to match current levels of inflation, furthering energy bill support, pausing deductions to benefits and halting debt enforcement and the use of bailiffs where households are vulnerable and unable to pay, are all ways in which those on the lowest incomes can be helped to navigate the current crisis.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said“Inflation is set to peak at an eye-watering 10% this year – a level we haven’t seen since 1982. It means there’s a good chance we haven’t seen the end of rate rises. Already, despite maintaining a slow and steady pace of fractional rate rises, the combined impact of four rises in five months is catching up with us.”

“The Bank of England predicts the spending power of our income will fall 1.75% during the year, leaving us all struggling, and life is going to get even harder for borrowers. Those with large variable-rate mortgages could find their monthly payments have risen by £100 or more since December. Fixed-rate borrowers are shielded from the impact of the rises for now, but when they come to remortgage, it will hit them in one, knock-out blow. Meanwhile, credit card costs and new loans will continue to creep up, so anyone borrowing to stay on top of rising prices will pay an even higher price for it.”

“Banks will be falling over themselves to pass on the rise to variable rate mortgage customers before the ink dries on the Bank of England announcement. In fact, Halifax fell over its own shoelaces and accidentally announced its rise before the Bank of England’s decision.”

“If you’re one of the 1.1 million people on a standard variable rate mortgage, or one of the 850,000 with a tracker, your costs will rise. Someone with a £300,000, 25-year, repayment mortgage on the average SVR could see their monthly payments go up by over £40 a month. And while in isolation this doesn’t sound like an impossible stretch, the steady ratcheting up of rates since December will be taking a toll.”

“Three quarters of mortgage holders are protected by a fixed rate mortgage, but while they’ll be reaping the benefits during the fixed period, it means they’ll feel the impact in one fell swoop when their mortgage expires. The Bank’s efforts to bring in rates gradually and smoothly will be no use to anyone who remortgages and sees their rates jump overnight. 1.5 million of these fixed rates are set to expire this year.”

“Credit cards feel like they can’t have anything to do with the Bank of England, given the massive gulf between a 1% base rate and an average card rate of 18%. However, the cost of doing business is one of the factors lenders consider when setting rates, so when rates rise, they’ll often be passed directly onto credit card holders.”

Dr Tony Syme, Macroeconomic Expert from the University of Salford Business School, said “Living standards are now being eroded by inflation and the policies to address it will only make the living standards crisis even worse.”

“The latest rise comes a day after the Federal Reserve announced the largest increase in interest rates since 2000 and two days after the Reserve Bank of Australia raised interest rates for the first time in more than a decade. They all cite the same reason: rising inflation”

“But that pursuit of the stable prices is likely to have serious consequences on a British economy that is fundamentally unbalanced. The Bank of England is only making matters worse. It should focus on co-ordinating with the Treasury to boost business investment and raise productivity. That will help to raise living standards and keep domestic inflation low in the long run, while changes to government policies around skills training and migration could tackle the current labour shortage in the short run.”

“A rise in living standards is driven by rises in productivity and these are sustained by business investment. But the latest figures for business investment show that it is still 8.6% lower than it was in 2019 and, following a survey of its members, the British Chambers of Commerce recently revised downwards it projection for business investment growth in 2022 by over 30%.”

“Without investment to drive forward permanent increases in productivity and, in the absence of any other supply-side factors to boost the British economy, living standards can only increase via short-term boosts to demand via trade, household consumption and government expenditure.”

“While Brexit has had a negative impact on the UK’s trade balance, it has been the maintenance of household consumption throughout the pandemic and the very large rise in government expenditure that has created the growth in the economy in recent times.”

“Interest rate increases raise the cost of borrowing for both households and businesses. Reductions in household spending have a negative effect on the economy in the short run. Reductions in business investment have a negative effect on the economy in the long run.”

“Little wonder that the GfK Consumer Confidence index is now -38, the second-lowest reading since records began almost 50 years ago, and the Institute of Directors’ economic confidence index fell from -4 in February to -36 in April.”