The Bank of England today raised the UK base interest rate to the highest level seen for 13 years.
The increase to 1% now means the Bank of England (BoE) has hit its own self-imposed threshold to now publish the next steps in its plan to reduce billions of pounds worth of assets built up over 12 years of quantitative easing following the financial crisis.
Financial markets had been expecting the increase to be 0.5% but it is thought the Monetary Policy Committee (MPC) has decided to move more cautiously as UK households are squeezed by inflation, leading to lower demand and slower economic growth.
Members of the MPC have already raised rates at each of its past three meetings to try to rein in inflation, which hit a 30-year high of 7% in March. In unprecedented times, the BoE is in an exceptionally tricky position as it seeks to rein in soaring inflation without pushing the economy into a recession.
“UK inflation continues to run at a high level, so we should expect further rate hikes later in the year, with 25 basis point moves still the most likely course of action,” Chris Beauchamp, chief market analyst at IG, said.
“While this means the pound will remain under pressure against the US dollar, it allows the bank to proceed with its hiking policy without putting too much pressure on the economy, which remains in a weaker position than its US counterpart.”
How will the increase affect you?
Data suggests around 2 million households could see monthly payments rise as a result of the decision.
Around 850,000 borrowers are on base rate tracking mortgages, which directly track the Bank of England base rate, a further 1.1 million are thought to be on standard variable rate mortgages, which follow a rate set by the lender – although this often follows BOE rate increases. Clients on fixed rate mortgages are protected from interest rate increases until the fixed rate expires.
What can you do?
Andy McBride, Managing Director at Cleerly had this advice for homeowners on variable rate mortgages or nearing the end of fixed rate deals:
“Despite the latest base rate increase there are still some fantastic fixed rate options available for home movers and those looking to remortgage. We are in unprecedented times, rocketing energy and food costs have precipitated the worst cost of living crisis since the 1950’s and with the war in Ukraine threatening to worsen the price shock now could be the time to secure a fixed rate and shelter yourself from any further rate increases.”