The Bank of England has announced it will hike interest rates to their highest in more than 13 years and indicated it believes the economy is already in recession.
The central bank had previously projected the economy would grow in the current financial quarter but said it now believes Gross Domestic Product (GDP) will fall 0.1%.
It comes after a reported 0.2% fall in GDP in the second quarter and would mean the economy is currently in recession.
A technical recession is when the economy shrinks for two quarters in a row.
The Bank’s Monetary Policy Committee (MPC) decided to raise rates to 2.25% – their highest since November 2008 – from 1.75%, in an effort to grapple big increases in the cost of living.
In committee minutes, it said the “tight labour with wage growth and domestic inflation” above targets called for a “forceful response”.
The decision to lift rates is a bid to keep inflation under control. It is the best tool that the Bank of England has to steer inflation – currently at 9.9% – back to its 2% target.
In the September meeting, the MPC also said inflation is now not due to soar as high as previously expected after Government announced plans to freeze energy prices for households earlier this month.
Consumer Price Index (CPI) inflation is now set to peak at “just under 11%” in October. This would mark the highest inflation the UK has witnessed since January 1982.
StepChange Debt Charity says that, for the one in seven new clients to the charity who are mortgage holders, the prospect of a rise in mortgage rates on the back of the rise will increase their debt worries. Having begun the year at 0.25%, Bank rate is now 2.25% with the strong prospect of further rises.
Even if people are on a fixed rate mortgage now, they face the prospect of a rate hike when their current deal expires. When home-owners are already working hard to repay other non-mortgage debt, and facing rising cost of living pressures alongside, this kind of financial shock has the potential to knock them off track.
A typical mortgage rate on mortgages being arranged for clients by StepChange’s mortgage advice team has already risen from 1.88% in 2021 to 2.75% now and will certainly rise further as the market adjusts. The more that people have to pay to meet their mortgage commitments, the less budget surplus they have available to pay other debts and bills – so the wider squeeze on home-owner finances shouldn’t be underestimated, even if mortgage arrears remain under control.
In the wider credit market the effect of higher rates may be less immediately obvious, although higher debt servicing costs will gradually also be felt in consumer credit. Until inflation comes down, this means that people struggling to juggle their finances face the double whammy of both higher cost of living and higher debt servicing costs.
Taking debt advice can help – anyone struggling with their borrowing costs and debts should be aware of measures such as Breathing Space, for example, that can potentially give people 60 days during which most interest and charges and any enforcement actions are frozen to allow people time to get a suitable debt solution in place after taking professional debt advice. Although contractual mortgage payments are not covered by the Breathing Space scheme, it can apply to mortgage arrears and can help home-owners whose other debt commitments are unaffordable to get an affordable solution established that helps to protect their home and provides for sustainable repayments on other debts.
Richard Lane, Director of External Affairs and of StepChange Financial Solutions, the mortgage broker subsidiary of StepChange Debt Charity, said: “It’s always true that debt can cause problems for anyone, even though the concentration of problems tends to be most acute among those on the lowest incomes who are typically tenants. Right now, though, it’s home-owners who are likely to be feeling a rising sense of dismay at their affordability prospects as interest rates continue their upward march. If you’re worried, don’t hesitate to contact your mortgage lender and to contact StepChange for advice and help – the earlier you take action, the more likely it is that you can avoid more serious debt problems.”
