The Bank of England raised interest rates to 1.25 percent for the fifth month in a row today, but stopped short of raising them even higher due to worries that the economy is heading into recession.
The Monetary Policy Committee raised the base rate by 0.25 percentage points to a new 13-year high as it tries to contain spiraling inflation, which it now projects to reach 11% in October.
After bleak numbers this week revealed the UK economy is already in reverse, mortgage-payers were spared an even larger hike, which many analysts had predicted might be 0.5 percentage points.
The Bank predicts that GDP will shrink by 0.3 percent this quarter, compared to the 0.1 percent increase forecasted previously, placing the country on the verge of a full-fledged recession.
The MPC chose the smaller hike by a margin of six to three, suggesting that it was a close call.
The decision came at lunchtime, after the US Federal Reserve announced a 0.75 percentage point rate hike, the largest in decades, as it grappled with similar issues.
It is the first time since January 2009 that the Bank rate has risen beyond 1%.
Meanwhile, Lord King, a former governor, has encouraged Boris Johnson to be honest with the public about the ‘inevitable’ decline in living standards.
He predicted that the situation will be “reminiscent of the 1970s,” and that the Prime Minister must be forthright about what is going on.
‘Our leaders must provide a clear narrative explaining why recent events will inevitably lower our national standard of living, how that burden will be shared, why it is critical to reduce inflation, and why measures to boost economic growth and reduce regional disparities will take many years to implement but will only work if we start now,’ he wrote in The Spectator.
Governor Andrew Bailey, two deputy governors – Sir Jon Cunliffe and Ben Broadbent – and chief economist Huw Pill make up the nine-member MPC.
With headline CPI inflation expected to hit double digits by the end of the year, the MPC has voted to raise interest rates in each of the previous four meetings, in December, February, March, and May.
It has, however, been chastised for failing to respond swiftly enough to soaring costs and a sweltering labor market.
Three of the nine members of the Monetary Policy Committee voted for rates to be set at 1.25 percent the last time they met.
However, since then, several things have altered. The UK economy appears to be in trouble, with the OECD estimating that it would be the worst in the Group of Seven (G7) next year.
The Chancellor, who is planning to transfer billions to suffering households to help them deal with skyrocketing energy prices, has given the Bank a little more leeway.
Because the cost of borrowing will rise for homeowners, an increase in interest rates will eat into part of this giveaway.
A raise, on the other hand, will favor savers.
‘The internal block — Bailey, Broadbent, and Pill – will very certainly vote to raise Bank Rate by 0.25 percent this month,’ according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
‘And, given that several members believed the advice on additional interest rate hikes was outmoded last month, we expect at least one of them, most likely Cunliffe, to vote no change.’
‘We anticipate both rate expectations and sterling to fall in the aftermath of this week’s meeting, with markets pricing in a 34bp hike in Bank Rate this week and a further 41bp rise for the August meeting.’
‘The Bank of England faces a harsh test of its mettle at the next interest rate decision, and any hesitancy is likely to result in the pound being penalized on the currency markets,’ said Laith Khalaf, head of financial analysis at AJ Bell.
The price of gasoline and diesel, as well as other imports that the UK pays in dollars, would rise as a result of such a reduction.
For the first time this month, the average cost of filing a family automobile surpassed £100.
‘By raising interest rates, the Bank is slamming the brakes on an economy that is already declining on its own,’ Mr Khalaf explained.
‘This puts the economy at danger of slowing or worse, reversing.’
The Bank of England has raised the base rate for the seventh time since December in an effort to keep inflation under control.
The base rate has increased by 0.25 percentage points, from 1% to 1.25 percent, after previously rising from 0.1 to 1% over four consecutive increases.
The base rate has gone above 1% for the first time since February 2009, when it was on its way down following the financial crisis of 2008.
The Monetary Policy Committee’s decision to raise the rate is assumed to be motivated by continued inflationary pressure.
However, some economists believe it will be ineffective in containing cost-of-living increases brought on by increasing import prices for food and commodities, as well as rising energy expenses.
It comes only one day after the US Federal Reserve raised its key interest rate by 0.75 percentage point, to a range of 1.5 percent to 1.75 percent, the highest level since 1994.
Savings account holders will be expecting that the increase in the base rate would result in greater rates on their accounts.
Most homeowners with fixed-rate mortgages will not be affected immediately, but remortgaging will likely become more expensive in the future, depending on property price rise.
Variable rate mortgage holders are expected to see their monthly payments climb in the near future.
CPI inflation is now around 9%, but the Bank of England has revised its prediction and now expects it to peak at roughly 11% by October.
The MPC decided 6-3 to raise the base rate to 1.25 percent, with minority members preferring a 0.5 percentage point hike to 1.5 percent.
While the Bank of England has little control over global supply issues or energy costs, it does have control over the UK’s most significant interest rate.
The base rate determines the interest rate paid by the Bank of England to banks that hold its money, as well as the rates at which those banks charge consumers to borrow money or pay people to save.
It hopes that by hiking the base rate, Britons would find borrowing more costly and saving more rewarding.
This should, in principle, encourage individuals to spend less and save more, lowering inflation by slowing the economy and the quantity of money created by banks in new loans.
Savers will be hoping that the base rate will provide additional stimulus to the savings market, especially since no savings account currently comes close to keeping up with inflation.
Mortgage borrowers will be bracing themselves for more rate rises, since rates have risen significantly in the last eight months from record lows in October.
What does this imply for my loan?
Since last year, when base rates were at historic lows, with some packages priced at less than 1%, the rise in base rates has been pushing up mortgage prices.
The impact of this increase on borrowers is determined by the type of mortgage they hold.
The Bank of England’s decision means another hike for those not on fixed rates, the second this year, and even those on fixed rates will face higher interest rates when their term finishes.
Rates that fluctuate
Mortgage payments will increase immediately for those who have a standard variable rate (SVR), discount offers, or a base rate tracker mortgage with their lender.
As interest rates have fluctuated over the past year, fewer borrowers are opting for variable rates, preferring fixed mortgages as a hedge against future increases.
According to UK Finance, roughly 12% of mortgages are presently on a standard variable rate.
According to the trade association’s calculations, monthly interest payments for SVRs will increase by an average of £15.94 per month to £226 per month, resulting in a mortgage interest rate of 3.31 percent on a balance of £76,499.
‘Consumers are suffering a cost of living crisis, and back-to-back rate hikes are fueling the mortgage market,’ Rachel Springall, finance expert at financial information firm Moneyfacts, said.
‘Borrowers who lock in a fixed rate can insulate themselves from future rate hikes, but those saving for a deposit may find it difficult to qualify for a mortgage when interest rates and living costs rise.’
The average two-year fixed rate has risen by over 1% since December 2021, indicating that fixed rates are on the increase.
‘As the rate differential between the average two-year and five-year fixed rate has decreased, locking in for a longer period may be a wise decision.
‘If borrowers are willing to commit to such a long fixed period, they could even lock in a fixed mortgage for a decade.’
‘It’s sensible to get guidance to examine the number of options available so that borrowers may make the best decision based on the total genuine cost.’
Switching from an SVR to a fixed rate, according to Moneyfacts, can drastically cut a person’s mortgage repayments.
According to their estimates, the difference between the average two-year fixed mortgage rate and the SVR is 1.66 percent, and switching from 4.91 percent to 3.25 percent will save you £4,418 over two years.
Over the course of two years, a 0.25 percent increase on the current SVR of 4.91 percent would add nearly £700 to total repayments.
Rates that are set
Fixed-rate mortgages are by far the most popular among borrowers, with an estimated 75% of residential borrowers opting for them.
Those on a fixed rate will not notice the increase right away because they are locked into their current rate until the term finishes.
However, there are 1.3 million fixed-rate mortgages that will expire this year, and the rate rise would make remortgaging more expensive.
According to Moneyfacts, in December of last year, an average two-year fixed mortgage across all deposit amounts had an interest rate of 2.34 percent, which has now climbed to 3.25 percent and is expected to rise further following today’s increase.
That’s the difference between paying £881 a month and £975 a month on a £200,000 mortgage repaid over 25 years.
In the aftermath of the base rate hike, typical two-year fixed rates would climb by 0.25 percentage points, bringing the monthly cost to £1,001.
In December, the average five-year fixed mortgage had an interest rate of 2.64 percent. This has already grown to 3.37 percent and is expected to continue northward.
The usual lowest two-year fix provided by the 10 major lenders currently stands at more than quadruple the rates on offer last October, even before the latest rate hike, according to L&C Mortgages.
‘Those who are on a fixed rate will be shielded from the present hikes, but should plan ahead as rates are rising fast,’ said David Hollingworth of mortgage broker L&C.
‘It’s possible to lock in a rate up to six months before an agreement expires, which might help you beat any future rate hikes.’
Those who are now benefiting from a cheap rate, on the other hand, may need to change their expectations when their offer expires in the future.
‘Borrowers may experience rate shock when a current low rate expires and they discover that the rate environment has changed.’
‘If they are now benefiting from a particularly low rate, they may wish to overpay to help decrease the mortgage for when they have to convert to a higher rate, albeit with the cost of living pinch, that will be more difficult to achieve.’
What does this signify in terms of my savings?
While the increase in the base rate may be bad news for mortgage borrowers, it will be welcomed by savers who have been sitting on record low rates for years.
If depositors received a 0.25 percentage point increase, they would get £50 more in interest per year based on a £20,000 deposit.
During the first half of 2022, rates ticked upward at a moderate pace after the four prior fast base rate hikes.
the highest point With new market-leading rates to report practically every week, This is Money’s independent best purchase tables have been a hive of activity.
The top easy-access contract currently pays 1.52 percent, which is more than three times what it was last year.
According to Moneyfacts, the best one-year fixed agreement pays 2.6 percent, while the best two-year fixed deal pays 3%, the most since early 2013.
While the top rates have risen significantly, most savers’ money is still languishing in accounts that yield close to nothing.
For those who refuse to shift their money to another offer, there is no reason to believe that this will change.
Barclays, HSBC, Halifax, Lloyds, NatWest, and Santander have scarcely passed on any of the past base rate hikes to its easy-access customers, which are where the bulk of savers hold their money.
Since the initial rate hike in December of last year, Barclays Bank has kept its Everyday Saver at 0.01 percent, while HSBC, Lloyds, Santander, and NatWest have raised their easy-access rates from 0.01 percent to 0.1 percent.
TSB and Halifax both give 0.15 percent for using their easy-access savings accounts, while Nationwide said on Tuesday that its easy-access offering will be increased by just 0.05 percentage points starting in July.
The UK’s largest building society will increase the rate it pays loyal savers from 0.11 percent to 0.15 percent to 0.16 percent to 0.2%.
‘Interest rates on savings accounts are on the rise, due primarily to competition from challenger banks and building societies,’ said Rachel Springall, a financial expert at Moneyfacts.
‘If loyal savers do not move, they may not be getting the greatest bargain and may miss out on a top rate.
‘Since December 2021, several of the top high street companies have passed on only 0.09 percent, and none have passed on all four base rate hikes, totaling 0.9 percent.’
‘Savers should study the top rate tables because there have been significant changes in recent months.’
‘Today’s finest discounts may have a short shelf life, and some may have qualifying requirements that must be completed.
‘However, if savers are willing to put in the effort, they may be able to get a considerably greater return on their money than if they keep it in a huge high-street bank for convenience.’
How high will interest rates rise?
Over the last several weeks and months, we’ve witnessed some significant achievements.
As one-year rates break past the 2.5 percent barrier to a seven-year high, savers are flocking back to fixed bonds.
The best one-year contract was only 1.36 percent at the start of the year. Atom Bank, on the other hand, currently offers a high rate of 2.6 percent.
Longer term fix rates have also improved significantly, however the difference between one year and five year arrangements is only 0.65%.
Three different savings companies are currently providing packages that pay 3% or more. The most notable is BLME, which is providing a two-year rate of 3% and a five-year rate of 3.25 percent.
Meanwhile, since the beginning of the year, the best easy-access deal has increased from 0.71 percent to 1.52 percent.
With inflation predicted to approach 10% and more base rate hikes on the way, combined with fierce rivalry from challenger banks, it’s difficult to see how rates won’t continue to increase, at least for the time being.
‘It’s tough to anticipate where rates will go exactly, but they will continue to grow this year – I’m convinced of it since I can’t see a single thing that would cause rates to decrease,’ said James Blower, creator of The Savings Guru.
‘We also have four new entrant banks that have been granted conditional approval and will begin operations in the second part of the year.
‘New entrants always price aggressively to entice new depositors, so this will only add to the market’s dynamism.
‘I believe we will conclude the year with easy-access best buys at 1.6 to 1.7 percent and a one-year fixed contract around 3%,’ says the analyst.