Bank of England raises interest rate to 0.25% – reaction

The Bank of England has raised interest rates for the first time in three years amid growing concerns over inflation. The Bank’s Monetary Policy Committee (MPC) voted by a majority of eight to one to raise rates from the historic low of 0.1%.

With inflation at a ten year high, the Bank said this was unlikely to ease in the coming months, with the inflation rate likely to climb from the current 5.1% to 6% next spring. This would put inflation at three times the Bank’s 2% target. BoE governor Andrew Bailey said the Bank’s rate-setters had thought “long and hard” about the impact of the Omicron coronavirus variant on economic activity before making their decision. The MPC also revised down its expectations for GDP growth in the final three months of the year to 0.6%, from 1% in November. They also voted unanimously to maintain the Bank’s asset purchase scheme at £875bn.

Charles Roe, Director of Mortgages at UK Finance, said “Today’s interest rate increase marks a rise from historically low levels. Over 74 per cent of mortgage customers are on a fixed rate product and will see no immediate change to their mortgage payments. For those who have come to the end of their deal, a wide range of mortgage products are available and we encourage homeowners to shop around and choose the best one for their circumstances. Any customers with concerns about managing their mortgage should contact their lender who will be able to explore the range of individual support options available.”

Tommaso Aquilante, UK Lead Economist at Dun & Bradstreet said “Although inflation levels have been off-target for some time now, markets were largely expecting the Bank of England to see how the Omicron variant played out before increasing rates. As the British public is asked to mask up against the backdrop of Omicron, it’s also key that businesses have financial protective measures in place too.”

“The future was looking somewhat brighter for the UK economy pre-Omicron, and even though booster vaccinations are well underway, we are still facing a turbulent economic environment. This is especially true for those in the hospitality sector. The latest analysis from Dun & Bradstreet’s COVID Impact Index reveals that food and beverage businesses continue to be the most impacted sector in the UK, with a rating of only 28 on a scale of 100 (1 being most impacted and 100 being least impacted), compared to the national average of 51.”

“Going forward, businesses must assess the risk of certain impending scenarios. For instance, the repayment of Bounce Back Loans is already affecting businesses across the supply chain. With the economic outlook deteriorating, access to finance will be critical. It’s more important than ever for businesses to have a comprehensive view of their suppliers, customers and prospects to identify risk.”

Federation of Small Businesses National Chair (FSB) Mike Cherry, said “This move will increase pressure on small firms with debt – four in ten of which describe their level of borrowing as ‘unmanageable’.More than a million small businesses took out loans during the pandemic, with a significant proportion of them first-time borrowers. Many took on debt more than a year ago, on the basis that Covid would be under control by now.”

“While Bounce Back Loans thankfully have a fixed interest rate, a lot of facilities held by firms – including Interruption Loans and debt that predates lockdowns – will be affected by the uplift, alongside personal borrowing. Any increase could push those just managing to make ends meet to the brink. There is a strong case that CBILS borrowers need to be offered flexibility over repayment, similar to the Pay as you Grow scheme that Bounce Back Loan borrowers can use.”

“That said, with many businesses far past the point where they can absorb surging input costs, the hope is that this intervention helps to curb price rises. The concern, by contrast, is that this increase proves to be the worst of both worlds: too little to rein in inflation, and too much for indebted businesses who cannot afford extra repayments.”

“Consumer demand has been sharply suppressed by the onset of omicron – the imposition of Plan B and last night’s Government press conference are only exacerbating matters. The advice now is to err on the side of staying home, but that advice is not being backed up by support for businesses which have seen their takings crater as a result.”

“The situation is critical. And yet, where is the support that small businesses need? We’ve put recommendations to policymakers and – in these final crucial days before Christmas – it’s more than time for the Government to step in. If it doesn’t, many smaller firms may not make it to the end of this year.”

Kitty Ussher, Chief Economist at the Institute of Directors, said “Business leaders will be relieved that the Bank has demonstrated its determination to take action on inflation by leading the world in raising rates even as the Omicron situation remains uncertain.”

“Our internal data over the last few months had been causing us concern that high expectations of future inflation are increasingly embedded. Yesterday’s inflation data confirmed our suspicion because it showed price rises spreading across the economy rather than being confined to transitory factors.”

“At this point in time, most business leaders are more concerned about inflation than the rising cost of debt and so this demonstration of leadership by the Bank will be welcome.”

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown said “The high street banks will clobber mortgage borrowers, hiking their variable rates to the max as quickly as possible. Meanwhile, savers will grow old waiting for them to pass on rises in savings rates. And while we won’t see a vast number of accounts from other providers boosting rates overnight, there are better deals available for those who are prepared to shop around.”

“High street banks have suffered a couple of years of horribly squeezed margins, with rock bottom rates leaving them little room to manoeuvre. They’re likely to see this as an opportunity to get a bit of breathing space, and expand those margins, hiking costs for mortgage borrowers and leaving savers hanging.”

“Given that growth was only marginally lower than expected, unemployment fell and inflation was much higher than anticipated, the bank felt they had no alternative but to raise rates. With Omicron on the rise, they’re not entirely certain what impact it will have on global economies, but so far each successive wave has had a smaller impact than the last, so 8 out of 9 members of the committee decided that the need to nip inflation in the bud trumped Covid-related concerns – particularly given that there was a chance it could actually add to inflationary pressures. Only one member of the committee called for rates to remain where they were while the full impact of Omicron.”

Richard Eagling, Senior Personal Finance Expert at NerdWallet said “This decision won’t be good news for many households. Indeed, the cost of living is rising at a rapid rate. And if inflation continues to spiral, the BoE could be forced to increase the base rate much faster than expected – and this could be an even bigger blow for vulnerable households.”

“As such, it is vital that the BoE lays out a clear plan for interest rates in their monetary policy report. So too, must it set out a strategy to work closely with the Government to address rising inflation. Of course, the emergence of the Omicron variant has complicated matters, but action must be taken to begin restoring consumer confidence and get the UK economy back on track.”

“For now, households should remain calm, and seek help where necessary. There are debt charities such as StepChange on hand to help individuals in financial difficulty. Further, people can speak to creditors about possible repayment options, if they are concerned about meeting deadlines. Seeking help as early as possible will help to minimize financial damage later down the line.”

Richard Pike, Phoebus Software sales and marketing director, says “This may be seen as an unusual step at this time of the year, especially with the latest variant spreading across the country and further covid measures coming into force.  The inevitable interest rate rise may have been something that many believed would not happen this side of the new year but, with inflation outpacing government targets, it appears there was little choice for the MPC this month.

“Although the unemployment rate continues to fall and wage-growth has picked up, the cost of living is increasing all the time and we are already seeing serious mortgage arrears rising and house prices starting to level out.  We are once again heading into the new year with a huge level of uncertainty with many questions for which there are no answers at the moment.  Will there be further lockdowns? Can the government even afford for that to happen again?  It has to be said that if we don’t get Covid under control 2022 is going to be a struggle for many.”