Bank of England increases base rate to 1.25% – industry reaction

17th June 2022

More than 2 million households face increased mortgage payments after the latest Bank of England interest rate rise.

The Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase the bank rate by 0.25 percentage points, to 1.25%. The members in the minority voted to increase the bank rate by 0.5 percentage points, to 1.5%. The increase marks the fifth base rate rise since December 2021 after a decade of historic lows.

The committee expects inflation to be over 9% during the next few months and to rise to slightly above 11% in October.

The Bank rate has been increased from 1% to 1.25% as officials look to tackle rising inflation and borrowers who have variable mortgage rates will see their monthly repayments go up.

Analysis by industry body UK Finance shows that those on standard variable rates will see an average annual increase of £191, while for tracker deals the figure is £303. The increase affects a quarter of mortgage borrowers, which translates to about 2.25m households. The average monthly mortgage payment for those on standard variable rates has gone up by £90 – or £1,080 a year – since the Bank started increasing its interest rate from 0.1% in December. For more than 800,000 borrowers on tracker deals, the increase has been an average of £57 a month, or £684 a year.

Commenting on the historic increase in Base Rate, Nitesh Patel, Strategic Economist at Yorkshire Building Society, said “The Bank of England today announced a 0.25% increase to Base Rate, which means the official rate1 has hit 1.25% for the first time ever in almost 330 years. It is also the first time since July 2007 that we have seen a run of five consecutive changes which have all been increases.”

“The trajectory has clearly been set as the Bank of England look to bring inflation under control. However, there is a fine balance between achieving this and making sure that the economy, and more importantly jobs, are protected as far as possible given that a number of factors, such as rising food and fuel prices, will not be dampened by this latest increase.”

“Households are already struggling with the rising cost of living and, whilst this is good news for savers, mortgage borrowers will be looking to assess how this will impact their monthly outgoings. That said, the majority of borrowers are on fixed rate mortgages so in the short term, they will be unaffected, but the impact will be felt when they come to the end of their existing fixed rate deal and will inevitably be looking at higher mortgage rates.”

John Phillips, National Operations Director at Just Mortgages said “This latest increase now feels like rates are on the upwards swing of a pendulum which is rapidly gaining momentum. However, although this increase will translate into higher mortgage rates, the housing market remains resilient and feedback from our brokers across the country tells us that activity for purchases and re-mortgages remains high.”

“For those that remember mortgage rates more than three times the current level there will be an appreciation that there are still very well priced deals that need to be seized before they are withdrawn and re-priced. Great mortgage rates are often launched with a huge fanfare but withdrawn quietly so having the advice of a professional who tracks product movements can be invaluable in securing the right deal.”

“There is no doubt in my mind that the value of mortgage advice is rising as fast as any household or cost of living bills. My advice for those looking to move or re-mortgage in the next six months is to find a mortgage broker and find one as soon as possible. Your next mortgage could be the cheapest you’ll have in your lifetime.”

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said “Consumers are facing a cost of living crisis and the back-to-back rate rises are fuelling the mortgage market. Borrowers who lock into a fixed deal can protect themselves from future rate rises, but those building a deposit may not be able to afford a mortgage as interest rates and living costs continue to climb.”

“Fixed rates are on the rise, with the average two-year fixed rate rising by almost 1% since December 2021. As the rate gap between the average two-year and five-year fixed rate has narrowed, fixing for longer may be a sensible choice. Borrowers could even lock into a fixed mortgage for a decade if they are prepared to commit to such a lengthy fixed term. Seeking advice is sensible to assess the abundance of deals out there to ensure borrowers find the most appropriate choice based on the overall true cost.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “After five rate rises in six months, we’re seeing the fastest cumulative rate rise since the end of 1988 – and it’s not over yet. The Bank of England now expects inflation to peak at an incredible 11% in October. It estimates that at that point the energy price cap will rise an eye-watering 40%, and that once the government’s cost-of-living payments kick in, they’ll add another 0.1 percentage points to inflation. So while the Bank has to wrestle with the opposing forces of trying to avoid damaging the economy and keeping a lid on inflation, it’s going to have to keep raising rates in the months to come.”

“It has taken a long time for higher rates to feed through into the savings and mortgage markets, but deals have started creeping northwards. For savers, making the most of the rises means considering both the providers and the corners of the market where the best deals are on offer. For mortgage borrowers, meanwhile, whether you’re on a variable rate and facing another horrible hike, or on a fixed rate and worrying about what happens when it comes to an end, shopping around is key.”

Federation of Small Businesses (FSB) Policy and Advocacy Chair Tina McKenzie said “This latest rise illustrates something every small business owner will be acutely aware of: rising costs are running out of control, and the operating environment for small firms is tougher than it has been for some time.”

“The increase will make access to finance for small firms more expensive. This makes announcing a successor to the Recovery Loans Scheme, which ends later this month, even more important.”

“FSB figures show finance application approvals drying up, so banks must promote the new scheme in good faith. And if we see a credit crunch following, as we did in 2008, having a scheme like this from the British Business Bank already up and running could be crucial, to combat the recession and protect small businesses from going under through a lack of cash.”

“The Bank of England recently used the word stagflation in connection to the current economic crisis, which is noteworthy and deeply worrying. Low growth coupled with high inflation will be a death knell to countless small businesses.”

“This is a scary moment. It’s hard to overstate how devastating the current spiralling inflation levels are, for businesses and consumers alike, and the longer the situation goes on, the more the damage compounds.”

“The Bank is required to try and rein inflation in, although there are question marks over how much it can actually do, given that many of the factors behind inflation, from war in Ukraine to oil prices, are outside its control.”

“Anything which adds to the margin pressure small firms and sole traders are facing – such as an increase in debt costs as the base rate rises – is hard to swallow. Small businesses are bearing the brunt of this crisis, with cash reserves eroded throughout the pandemic and with late payments intensifying.”

“The Government needs to act now. Households have rightly received help with their energy bills, while big businesses are able to use their bargaining power to get better deals from energy companies, but small businesses – especially micro businesses, with under 10 employees – are left high and dry and at the mercy of spiralling prices. We would like to see small businesses receiving relief via a reduction in business rates or a direct reduction to energy bills like the support households received, and for micro businesses to be eligible for the consumer price cap.”

“Today saw a fresh record for fuel prices, which hit small businesses hard. A further reduction in fuel duty, or even a cut in fuel VAT, would help ease the pain.”

“More widely, a cut in VAT would give the economy a real boost, and would be a lifeline to countless struggling businesses. At the very least, cutting VAT on energy would offer real help.”

“Some of the funding provided for businesses by the Government over the course of the pandemic, such as the Covid Additional Relief Fund, remains unspent, and councils should redouble efforts to get the funding out to firms who really need it.”

“Looking ahead, what businesses want is a reduction in uncertainty, and a sense that those in charge have plans to help the economy grow while understanding what businesses need in order to thrive. The levelling up agenda is great in theory, but we’re still waiting for real progress to be made. The long-delayed Enterprise Strategy should be brought forward, and late payments – which destroy thousands of otherwise-viable businesses every year – must be tackled through recently-announced audit reforms, with corporate boards made directly responsible for payment practices.”

Kitty Ussher, Chief Economist of the Institute of Directors, said “Our data shows that the high rate of inflation is of deep concern to our members, and is the main driver of pessimism among business leaders about the UK macroeconomy. We therefore welcome this rise in rates because it demonstrates the Bank’s determination to take action in the face of an unsettling macroeconomic environment.”

“As the Bank itself makes clear, not all of the ‘excess’ inflation above its 2 per cent target can be attributed to global events, so there is a role for UK interest rates to play its part.”

“What the economy now needs is a sense that inflation has peaked and is starting to fall back. With our own data showing very high expectations of future price rises, we aren’t at that stage yet, but today’s decision will at least help generate a sense that policy action is being taken”

Tommaso Aquilante, UK Lead Economist at Dun & Bradstreet said “News of rising interest rates was expected; the economic outlook has deteriorated fast over the recent months. The news contributes to clouding business prospects at a time when inflation and energy costs soar and national insurance increases. There’s also an unusually high public debt-to-GDP ratio, and coupled with the continuing effect of the Ukraine-Russia war on most of Europe, means businesses and governments continue to be plagued by uncertainty. In addition, Brexit might have acted as a shock amplifier through larger trade barriers (the Trade and Cooperation Agreement was no substitute for free trade or the EU agreement), reduced labour supply and greater uncertainty.”

“With the crisis directly or indirectly impacting businesses across the country, they must try to properly and efficiently analyse the danger of specific scenarios. Businesses, particularly those that trade internationally or use suppliers that operate in overseas markets, may need to take further action to protect themselves from potential financial risks, especially those caused by increases in the GBP/USD or GBP/Euro exchange rates. This includes having a comprehensive view of their suppliers, customers and prospects to identify cash flow risks and to help business decision-making while also capitalising on new growth opportunities.”