The Bank of England has hiked interest rates to 5%, as it intensifies its battle with stubbornly high inflation in a move that will inflict further pain on hundreds of thousands of mortgage payers.
In one of the highest profile decisions in a decade, Governor Andrew Bailey and his eight colleagues on the Monetary Policy Committee opted for a rise of a half a percentage point, double the size of the last rise.
Bailey said in a statement issued alongside the decision: “Inflation is still too high and we’ve got to deal with it. We know this is hard - many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”
Seven of the MPC members voted for the super-sized move at high noon on Threadneedle Street. Most forecasters predicted a smaller, quarter-point hike in the run-up to the meeting.
The decision takes the base rate, to which millions of loans are pegged, to its highest since 2008, with inflation stuck at almost 9% and proving harder for the BOE to tame toward its 2% target. Rates have been rising in the UK since December 2021.
Gary Smith, Partner in financial planning at wealth manager Evelyn Partners, predicted “more mortgage mayhem after this big-bazooka rate hike” adding: “The repricing of home loans looks likely now to be more dramatic and protracted.”
Banks and building societies have already pulled hundreds of fixed-rate deals this week alone, with the average two-year fixed mortgage rate at 6.15%, up from 6.07% and getting closer to the 6.67% peak reached last Autumn.
According to UK Finance, the half-point move will add around £47 to the average monthly mortgage repayment.
The Resolution Foundation has found that rising rates mean borrowers face extra costs of £2,900 a year from 2024 if they have to remortgage.
Attention is turning to where rates are now likely to peak. Some City experts think 6% is likely, which would add hundreds of pounds to the annual cost of a typical repayments.
Capital Economics’ Neil Shearing, group chief economist, called the rate call “finely balanced” but had predicted a vote for a 5% base rate before the meeting, in part due to higher pay.
“Inflation appears to have infected the labour market and wage setting to a greater extent in the UK than elsewhere,” he pointed out.
Rob Morgan, Chief Investment Analyst at Charles Stanley said the BOE was having trouble “getting the inflation genie back in the bottle”.
There were calls for restraint before the decision, at a time when hundreds of fixed-rate mortgage deals are being pulled from the market to be repriced. In what is now known as a mortgage time bomb, people facing the end of their agreed-rate home loan deals are facing a mortgage time bomb, from sharply higher repayments driven by the BOE hikes.
Rob Perrins, CEO of London-focused housebuilder Berkeley Homes, told the Standard this week that he was concerned that be BOE could ”overdo it”, with signs in the building trade that inflation had already eased off.
“If I was sitting on the committee, I’d be voting for a 0% [rate rise] this time around, because we are already seeing inflation coming down.”
James Smith, developed markets economist at Dutch bank ING, does not agree with talk that rates could go as high as 6% before the MPC is done.
“Barring some further unpleasant and consistent surprises in the services inflation figures over the coming months, we think a 5% peak for the [base rate] seems reasonable.
He pointed out that the mortgage market, the “main transmission mechanism” for BOE monetary policy now has a greater proportion of fixed-rate borrowers, making the amount of time rates are at 5% more important than where they peak.
“Around 90% of mortgages are fixed – predominantly for five years – a huge sea change compared to 10-plus years ago when most were on variable rates,” he said.
