The Bank of England (BoE) has increased the base rate by 25 basis points to 1%, the highest level since 2009.
The Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase the bank rate by 0.25 percentage points, to 1%. The members in the minority voted to increase the bank rate by 0.5 percentage points, to 1.25%.
The increase marks the fourth base rate rise since December 2021.
The MPC minutes show that the committee projects inflation to rise to 9% in April this year before “averaging slightly over 10% at its peak in Q4 2022.”
This rise will be mainly driven by energy price increases, the committee believes.
Further news includes UK GDP having grown by 0.9% in the first quarter of this year – stronger than expected – and the unemployment rate dropping to 3.8% in the same time period.
The MPC expects GDP to be “broadly unchanged” in Q2.
In March, the BoE increased the base rate by 25 basis points to 0.75% after the MPC voted 8-1, with a single member preferring to keep the base rate at 0.5%.
Previous expectations were that inflation would peak at “around” 7.25% in April 2022 but were revised upwards prior to the MPC meeting in March because of the Russian invasion of Ukraine and its attendant effect on commodity prices alongside further supply chain disruption.
Moneyfacts.co.uk finance expert Rachel Springall says the decision on the base rate increase will be “disappointing” news to consumers who are already facing a cost of living crisis.
Springall comments: “Borrowers sitting on a variable rate may want to lock into a competitive fixed-rate mortgage deal to protect themselves from rising interest rates, perhaps sooner rather than later as fixed rates rise, with the average two-year fixed rate surpassing 3.00%. Fixing for longer may be a logical choice for peace of mind with mortgage payments when other household costs are increasing.”
While the increase may not have come as a surprise to anyone after Chancellor Rishi Sunak has warned that rates could hit 2.5% by the end of the year, Just Mortgages national operations director John Phillips says this “coupled with the financial pressure of the cost-of-living crisis means that the pressure on household budgets is the greatest it has been for a decade”.
Data from the Office for National Statistics (ONS) showed that inflation in the UK had climbed to 7% in March.
This compares to a 6.2% rise in February, at the time the fastest rise recorded in 30 years. The figure is the highest inflation level seen in March since 1992, which was recorded at 7.1%.
ONS data found that energy costs for housing and transport were the main contributors to the rise, and that is without the inclusion of April’s energy bill price hikes – an average increase of 54% per household – which have yet to be brought into the inflation calculation.
With the steep rise in inflation, LiveMore managing director of capital markets and finance Simon Webb says we can expect further base rate increases this year.
Webb explains: “New borrowers and those remortgaging will find themselves with higher mortgage payments. With this in mind, there has never been a better time for borrowers to take out a longer-term fixed-rate mortgage.”
Quilter mortgage expert Charlotte Nixon comments: “With interest rates being hiked to 1% there will be swathes of the nation desperately trying to calculate what this actually means for their monthly payments.”
“Fortunately, the large majority of borrowers are on fixed-rate deals so won’t feel the hit until their mortgage deal comes to an end. However, those on variable or tracker mortgages could see their monthly payments creep up. A borrower with a home valued at around £250k on a 25-year mortgage could see their monthly payments rise by as much as £240 if interest rates go up another 1.75%,” Nixon explains.
“Inflation is predicted to continue to spike, and more rate increases may very well be on the cards. At present, the housing market continues to be buoyant despite significant headwinds and this may be because people are recognising that rates are on the move and are scrambling to buy so they can lock in a mortgage deal while they are still relatively low.”
“There have been years of ultra-low interest rates and many may suddenly struggle to meet their monthly payments and other outgoings if they stay in their current property, especially with rising energy and food prices on top. This could bring more houses to the market as people downsize and the laws of supply and demand dictate that that could mean we see house prices at the very least stall if not cool down.”
“First-time buyers continue to suffer significantly as they are faced with a myriad of problems including inflation eating away at their deposits, interest rates causing their monthly payments to be higher and the rest of the inflationary pressures. This may be one of the worst times in history to be trying to get your foot on the housing ladder,” Nixon adds.
Meanwhile, the US Central Bank announced it was increasing its benchmark interest rate yesterday by half a percentage point, to a range of 0.75% to 1%.
The increase, which follows a smaller increase in March, marks the biggest interest rate jump in the last 22 years. Further hikes are expected as inflation in the US has hit a 40-year high.
In a statement, the US Federal Reserve said: “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
It also highlighted that the invasion of Ukraine by Russia is causing “tremendous human and economic hardship”
“The implications for the US economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The committee is highly attentive to inflation risks,” the statement added.
Elsewhere, Halifax had to apologise to customers yesterday after emailing incorrect information on changes to the Bank of England’s base rate.
The email, which was sent out on 3 May to an unknown number of customers, informed people “The Bank of England base rate has changed today” and followed on to state “we want to help you understand what this could mean for you”.
Halifax later emailed customers to apologise for the “mistake” and “for any confusion caused” by the email error.
“The base rate has not changed today, the next scheduled Bank of England announcement is Thursday 5 May at midday. If a change is announced we’ll be in touch to let you know how it affects you,” the email stated.