Interest rates rise to 4.5% – credit industry reaction

12th May 2023

The Bank of England has raised its key interest rate by a quarter of a percentage point to 4.5%, marking its 12th consecutive rate rise. The BoE revised up its growth forecasts from gloomy numbers released in February, but it also now expects inflation to be slower to fall than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. The BoE predicts inflation will not return to its 2% target until early 2025.

StepChange debt charity says the Bank of England’s is another blow for household finances. The charity warns this could be a further catalyst for problem debt among mortgage holders nearing the end of fixed-rate deals, or for private renters whose landlords have passed on higher debt servicing costs.

At present, around one in seven mortgage holders (15%) who seek help from StepChange are in arrears on their mortgage, while arrears on other household bills such as gas and electricity remain alarmingly high among all StepChange clients.

Vikki Brownridge, Chief Executive of StepChange Debt Charity, said “The steep jump in interest rates we’ve seen over the past 12 months has been a shock to household budgets, compounding financial difficulty for people who are already struggling to make ends meet. As time goes on, more mortgage holders will be facing the prospect of a new fixed rate deal or variable rate which will consume a larger proportion of their income, making it increasingly difficult to meet other financial commitments.”

“The situation is becoming increasingly precarious for many people and widespread problem debt is a risk, particularly for financially vulnerable households. We would urge firms to be proactive in identifying and communicating with customers who might be falling into difficulty by offering tailored support and signposting to free debt advice.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said “Today’s decision to further raise interest rates will be met with anxiety from many homeowners as higher costs pile yet more pressure on household budgets.”

“For people on variable rates, and others coming to the end of fixed rate terms, this rise is likely to take a heavy toll as repayments increase.”

 “Higher interest rates will also impact swathes of renters, as higher mortgage costs are passed onto tenants.  Millions are already struggling with rising costs across the board.  

Paul Heywood, Chief Data & Analytics Officer at Equifax UK, said “The Bank of England has continued its run of remarkably consistent base rate rises with another quarter per cent increase today. While this consistency may have played a role in business and consumer confidence increasing month-on-month in 2023; consumers likely find themselves with a coronation hangover, as the realities of high borrowing costs and squeezed wages hit home.”

“With rates rising we expect cases of ‘mortgage shock’ to rise in the next six months – as many as 1.4 million consumers will face a 50% increase to their mortgage repayments. This shock may force consumers to high-cost short-term credit to meet existing debt obligations, a spiral that Equifax, and our lending partners, work hard to identify and prevent. We’ll continue to ensure that consumers are effectively supported throughout their borrowing journey and can access the credit they need to live their financial best.” 

Andy Mielczarek, Founder at Chetwood Financial , said “Today’s quarter-point rise from the Bank of England is another reminder that inflation isn’t coming down fast enough, and households across the UK are feeling the effects. According to ONS data, the prices of food and non-alcoholic drinks are rising at the quickest rate in over 45 years – a factor which could lead to further hikes to the base rate this year.”

“One upside for rapid interest rate rises is that consumers and investors should get more interest on their savings. But interest rates for easy-access accounts have often not kept pace with hikes to the base rate, which means that people could be losing out on potential gains on the money held in traditional accounts. For those in a position to put aside a lump sum and allow that pot to grow, it’s vital that savers explore how different savings instruments can support their financial goals. In many cases, fixed-term, fixed-rate bonds can offer much higher interest, while many savers will benefit from looking beyond traditional high street banks.”

John Phillips, National Operations Director at Just Mortgages said “We were all hoping that inflation would fall and negate the need for this rise but it remains stubbornly resistant to a variety of financial instruments although economists are still predicting it will fall significantly by the end of the year.”

“However, on a positive note, reports from our brokers across the country are of strong interest in new mortgage applications and many lenders are lowering rates and tweaking criteria to make products more accessible to borrowers. House price growth has slowed but there is no sign of any significant drop which was on most commentators lips this time last year. As a result, confidence in the housing market remains strong and professional advice from brokers is helping borrowers get the mortgages they need for the houses they want.” 

Paul Broadhead, Head of Mortgage & Housing Policy at the Building Societies Assocation said “As inflation rates remain above 10% a further Bank Rate increase was always a real possibility. It is, however, widely expected that we are now at, or very close to the peak.”

“Following the 11 Bank Rate increases in the last 18 months, the interest paid to savers has been rising. Whilst the last decade has been a difficult time for savers, particularly those who rely on their savings for income, shopping around can now make a sizeable difference to the returns available. There is a wide range of savings accounts available, which vary depending on the provider, term and access required, with attractive rates available for all levels of savers.”

“For mortgage borrowers, this latest increase is less positive, particularly for those who will be coming to the end of a fixed-rate term this year. Most will see a significant increase in their mortgage costs, which will be on average around £176 extra a month for those with a two-year deal. Whilst our figures show that around nine in ten homeowners are not currently concerned about their ability to make their monthly mortgage payments, only time will tell whether they have factored future increases into their household budgets.”

“Lenders continue to remain alert to borrowers who are worried about making their mortgage payments and are ready to offer tailored support to anyone who may be struggling.”

Simon Webb, Managing Director of capital markets and finance at LiveMore, said “The 0.25% increase in the Bank of England base rate to 4.5% was not unexpected and the money markets have priced this in. The last time the rate was this high was in October 2008 when governments were bailing out banks due to the global financial crisis.”

“This rise is the 12th consecutive increase reflecting the persistence of high inflation. Although food costs remain high, the fall in wholesale gas prices and petrol could ease inflation a little, and although we have not gone into recession the economy is still volatile.”

“The jury is out over whether there will be another hike upwards in base rate when the MPC meets next month. The MPC’s report today states an expectation of the base rate peaking at 4.75% in Q4 2023 before falling back down to 3.5%.”