The Bank of England has raised interest rates to 1% from 0.75%. The Bank has warned inflation is set to peak at over 10% this year and forecast the economy will contract in 2023, by 0.25%.
The Bank of England’s monetary policy committee (MPC) of nine members voted six to three in favour of increasing interest rates to 1% from 0.75%.
The central bank said a minority of three members, Jonathan Haskel, Catherine Mann, and Michael Saunders, voted to raise interest rates by 0.5 percentage points to 1.25%.
Paul Johnson, director of the Institute For Fiscal Studies, warned of the impact on people’s mortgages of an expected interest rates hike by the Bank of England on Thursday.
“We are still at historically staggeringly low levels of interest rates,” he told Radio 4’s Today programme.
“So you look at it that way and think one quarter of a percent, half a percent, still a very low level, that doesn’t look very dramatic.
“On the other hand, of course, if you’ve got a mortgage and it goes up by half a percent or 1% proportionally that’s a very big increase.
“That could be doubling your mortgage interest payments over a period of time, so even small changes now, at least down the line once people certain fixed rates run through, could have really big effects on people who have got significant mortgages.”
StepChange Debt Charity has warned that a further hike in the cost of borrowing will add to the financial woes of low-income households unless targeted, tangible support from Government is forthcoming. The cost of living is now the third most common reason for people approaching the charity for help.
StepChange is warning that if the country is to avoid a prolonged hangover of household debt problems that will hamper society and the economy for years, the Government needs to take additional steps to shore up the finances of those on the lowest incomes.
StepChange Director of External Affairs Richard Lane said: "The current level of support offered by Government, while welcome, falls short of what’s needed to mitigate the double whammy of rising inflation and interest rates the country now faces. The Treasury showed itself to be agile and reactive to the country’s financial challenges during the pandemic – it’s now time to display these same traits in response to a similarly dire situation. Measures including raising benefits to match current levels of inflation, furthering energy bill support, pausing deductions to benefits and halting debt enforcement and the use of bailiffs where households are vulnerable and unable to pay, are all ways in which those on the lowest incomes can be helped to navigate the current crisis.”
In its report, the Bank of England Monetary Policy Committee (MPC) said the jump in energy prices will drive the continued growth in inflation.
“Consumer Price Index inflation is expected to rise further over the remainder of the year, to just over 9% in 2022 Q2 and averaging slightly over 10% at its peak in 2022 Q4,” the MPC said.
“The majority of that further increase reflects higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October.
“The price cap mechanism means that it takes some time for increases in wholesale gas and electricity prices, and their respective futures curves, to be reflected in retail energy prices.
“Given the operation of the price cap, consumer price inflation is likely to peak later in the United Kingdom than in many other economies, and may therefore fall back later.
“The expected rise in CPI inflation also reflects higher food, core goods and services prices.”
Nathan Emerson, CEO of Propertymark, the leading professional body for estate and letting agents, said: "Today’s rise is understandable from a wider economic point of view and considering where they have been they are still historically low. The concern around the recent rises are that they are coupled with high house prices. However, house prices have only risen at such a rate as buyers have been prepared to pay over the marketed price to secure a home above others.
"Whilst this competition is cooling down in some areas it is still present with large amounts of people wanting to move. We don’t anticipate this demand will be watered down but what those movers are able to pay will certainly start to be reconsidered over the coming months."
