Bank of England raises interest rates to 5.25% – consumer credit industry reaction

4th August 2023

The Bank of England has raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25%.

The increase to 5.25%, the fourteenth rate rise in a row, taking the base rate to the highest it’s been since April 2008. The MPC voted 6 to 3 in favour of the 0.25% rate rise, with two members preferring a steeper rise to 0.5% and one preferring to leave the rate

Commenting on the rise Jane Tully, Director of External Affairs and Partnerships at the Money Advice Trust, said “With interest rates at a 15-year high, the impact will be felt heavily for homeowners whose current mortgage terms are soon to end and people on variable rates. Prices remain stubbornly high across the board, and today’s news will add to the worries of many households, particularly people already behind on repayments.”

“Higher interest rates are also often passed onto tenants, adding to the anxiety for millions of people with strained budgets living in rented accommodation.”

Richard Lane, Director of External Affairs at StepChange Debt Charity, said “Whilst some reports suggest that the base rate may not rise much further if at all beyond today’s 0.25% hike, this latest increase will still be difficult news for millions of people’s finances. Those who have already fixed onto a new mortgage rate in the last few months will be facing significantly higher monthly payments, while many landlords have already passed on higher debt servicing costs to their tenants, making the private rented sector increasingly unaffordable to renters on low and middle incomes.”

“With no certainty over how long rates will remain high for, the cost of living will continue to push people into difficulty. While StepChange hasn’t yet seen a rise in the proportion of clients with mortgage arrears, it’s likely that this could start to shift over the coming months, as homeowners’ financial resilience takes a knock from increasingly squeezed budgets.”

“Earlier this week the FCA’s new Consumer Duty came into effect, and part of this sets out what is required of firms for supporting customers experiencing financial difficulty. This is an opportunity for lenders to make sure they are effectively identifying customers who are struggling and offering tangible and tailored support.”

David Morris, Chief Commercial Officer at Yorkshire Building Society said “While a 0.25% increase was in line with the consensus, the split of opinions with two members of the MPC voting to increase by 0.50%, six in favour of a 0.25% rise and one member voting for a reduction, shows how finely balanced the decision was.”

“It appears the key challenge is that the MPC has not seen enough economic data to confirm inflation is truly under control despite ‘starting to see more promising signs’, with wage growth still a concern but positively energy, food and core goods prices are coming down. There is a sense we may well be close to an interest rate peak but all that could change as more economic data becomes available.”

“For the moment, the market seems to have taken this increase in its stride and the underlying funding costs that underpin mortgage market pricing have remained well below the peaks we saw a month.”

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said “There has been a huge difference between the base rate and the interest rates made available to savers by high street banks. As inflation remains elevated, it is critically important that savers have access to competitive rates. Positively, as of Monday, the new Consumer Duty rules mean that all banks will be under more pressure to do right by consumers and pass on today’s interest rate increase to savers without undue delay.”

“Time and time again, challenger banks have proven themselves to be more reliable at providing customers with competitive products as interest rates change. Consumers should not just assume that their bank will offer them the best deal. Searching the market for alternative products remains vitally important, and branching out from established high-street names remains one of the best ways for people to lock in a better deal.”

Neil Kadagathur, Co-Founder and CEO of Creditspring, saod “Even before this latest interest rate rise, a quarter of people were dipping into their savings to make ends meet each month – increased interest repayments are likely to completely erode savings pots pushing many towards relying on credit to survive. Almost a fifth of people are due to remortgage soon and are hugely concerned about the future costs, today’s rate rise has confirmed their worst fears.”

“Borrowers across the UK are in need of urgent support, but too many find themselves at the mercy of unscrupulous lenders offering extortionate terms. The FCA’s Consumer Duty will provide some protections but the onus has to be on lenders to become more transparent around charges and repayment terms, and treat customers fairly in times of difficulty. Otherwise the UK is balanced on the verge of a credit crisis.”

Andrew Gething, Managing Director of MorganAsh said “Today’s decision to raise the base rate was certainly not unexpected. While we have seen inflation improve recently, the momentum is just not quite there yet to give the Bank of England confidence to pause. Pressures in the labour market and with services inflation will undoubtedly remain a key consideration for the MPC moving forward.”

“For many borrowers, the hope will be that today’s news doesn’t have an impact on fixed-rate mortgages, which have been showing signs of improvement. This is especially true for the large number still set to remortgage in the near future.”

“For those with standard variable or tracker rates, the news of a fourteenth rise to the base rate will be most unwelcome, pushing household budgets even further. With the expectation that this may not be the last rise either, lenders must have a close eye on this group of customers and any others facing difficulty, especially with Consumer Duty now in force.”

“The arrival of Consumer Duty is an important reminder to the sector to ensure systems are in place to identify when customers are vulnerable and to protect those who are. Without a consistent approach to identify and monitor vulnerability, it’s impossible to ensure good outcomes for all customers – a clear requirement of the new Duty.”

Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown said  “As widely expected, the Bank of England raised rates another 0.25pp to 5.25% in a move that will further squeeze our budgets. The good news is that, while proving exceptionally sticky, inflation is falling – with the recent drop from 8.7% to 7.9% proving far sharper than many expected. However, the fact remains it is way over the Bank’s 2% target and there’s still a long way to go, so further interest rate hikes are likely.”

“Today’s rise piles further misery on homeowners with those on tracker mortgages seeing rises overnight. Standard variable rate mortgage holders may find their rates move up slightly less but, with budgets under strain, any increase is hugely unwelcome.”

“For fixed rate mortgages, the story is different with signs that we may be around the peak. We’ve seen big rises in fixed rates in recent times which have caused real alarm. After rising from less than 6% in the middle of June, the average two-year fixed-rate mortgage hit 6.86% in late July, according to Moneyfacts. However, by yesterday, they had inched down to 6.85%. In recent days, we’ve seen a raft of major lenders cut their rates, so we’re expecting average rates to drop further.”

“This is because fixed rate deals are priced based on what the market expects to happen to interest rates in the future. As inflation proved hard to tame, we saw rates rise but the recent sharp fall means the market isn’t expecting interest rates to go quite so high. As a result, it’s cheaper for lenders to secure a fixed rate, so they are passing those savings on. Any downward trend will be welcomed by people looking to fix their mortgage costs, though it’s fair to say people looking to re-mortgage are finding themselves in a very different world to the one they were in when they got their previous deal.”