The Bank of England (BoE) raised the key rate by 25 basis points to 1%, the highest level since 2009.
The Monetary Policy Committee (MPC) voted by a majority of 6 to 3 to raise the bank rate by 0.25 percentage points, to 1%. Minority MPs voted to raise the Bank Rate by 0.5 percentage points to 1.25%.
This increase marks the fourth increase in the base rate since December 2021.
MPC minutes show the committee expects inflation to rise to 9% in April this year before “averaging just over 10% at its peak in the fourth quarter of 2022”.
This increase will be mainly driven by increases in energy prices, the committee believes.
In other news, UK GDP rose 0.9% in the first quarter of this year – stronger than expected – and the unemployment rate fell to 3.8% over the same period.
The MPC expects GDP to be “broadly unchanged” in the second quarter.
In March, the BoE raised the base rate by 25 basis points to 0.75% after the MPC voted 8 to 1, with only one 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 ahead of the MPC meeting in March due to the Russian invasion of Ukraine and its effect concomitant on commodity prices as well as further supply chain disruptions.
Moneyfacts.co.uk finance expert Rachel Springall said the move to raise the base rate would be “disappointing” news for consumers who are already facing a cost of living crisis.
Springall comments, “Borrowers sitting on a variable rate may want to enter into a competitive fixed rate mortgage deal to protect themselves from rising interest rates, perhaps sooner rather than later as fixed rates rise, the two-year average fixed rate exceeding 3.00%. Fixing longer can be a logical choice for peace of mind with mortgage payments when other household costs rise.
Although the increase may not have surprised anyone after Chancellor Rishi Sunak warned that rates could hit 2.5% by the end of the year, Just Mortgages director of national operations John Phillips, said this “coupled with the financial strain of the cost-of-survival crisis means that the pressure on the household budget is the greatest in a decade”.
Data from the Office for National Statistics (ONS) showed that UK inflation rose to 7% in March.
That compares with a 6.2% rise in February, at the time the fastest rise in 30 years. This is the highest level of inflation observed in March since 1992, which was recorded at 7.1%.
ONS data revealed that energy costs for housing and transport were the main contributors to the rise, and that was without the inclusion of April’s energy bill price hikes – an average increase of 54% per household – which have not yet been factored into the calculation of inflation. .
With inflation soaring, LiveMore managing director of capital markets and finance, Simon Webb, said we can expect further increases in base rates this year.
Webb explains, “New borrowers and those who are repaying will end up with higher mortgage payments. With that in mind, there’s never been a better time for borrowers to take out a longer term fixed rate mortgage. »
Charlotte Nixon, mortgage expert at Quilter, comments: “With interest rates raised to 1%, swathes of the nation will be desperately trying to figure out what this really means for their monthly payments.”
“Fortunately, the vast majority of borrowers have fixed rate agreements and therefore will not be affected until the end of their mortgage agreement. However, those with variable or tracker mortgages could see their monthly payments spike. A borrower with a house worth around £250,000 on a 25-year mortgage could see their monthly payments increase to as much as £240 if interest rates rise another 1.75%,” says Nixon.
“Inflation is expected to continue to soar, and further rate increases could very well be on the cards. At present, the housing market continues to be buoyant despite significant headwinds and this may be due to the people recognizing that rates are on the move and scrambling to buy so they can get a mortgage deal while they are still relatively low.
“There have been years of extremely low interest rates and many may suddenly find it difficult to meet their monthly payments and other expenses if they stay in their current property, especially with the rising prices of electricity. energy and food. This could bring more homes to market as people downsize and the laws of supply and demand dictate this could mean we will see house prices at the very least stagnate or even cool .
“First-time buyers continue to suffer significantly as they face a myriad of issues, including inflation eating away at their deposits, interest rates driving up their monthly payments, and the rest of the inflationary pressures. -being one of the worst times in history to try to get your foot on the housing ladder,” adds Nixon.
Meanwhile, the US Central Bank announced yesterday that it was raising its benchmark interest rate 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 jump in interest rates in 22 years. Further increases are expected as US inflation hits a 40-year high.
In a statement, the US Federal Reserve said: “Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures. .”
He also pointed out that Russia’s invasion of Ukraine is causing “enormous human and economic hardship”.
“The implications for the US economy are very uncertain. The invasion and related events create additional upward pressure on inflation and may weigh on economic activity. Additionally, COVID-related lockdowns in China are likely to worsen supply chain disruptions. The committee is very attentive to inflation risks,” the statement added.
Elsewhere, Halifax had to apologize to customers yesterday after emailing incorrect information about changes to the Bank of England’s base rate.
The email, which was sent on May 3 to an unknown number of customers, informed people that “the Bank of England base rate changed today” and then stated “we want to help you understand what it could mean for you”.
Halifax then emailed customers apologizing for “the mistake” and “any confusion caused” by the email error.
“The base rate has not changed today, the next scheduled announcement from the Bank of England is Thursday May 5th at noon. If a change is announced we will contact you to let you know how it affects you” , indicates the email.