The central bank’s Monetary Policy Committee (MPC) has made the decision to raise the UK’s base rate by 0.75 percentage points in an attempt to address the country’s soaring inflation rate. As a result, have increased from 1.75 percent to 2.25 percent which will have a massive impact on savers and borrowers in the UK. This “record rise” represents the biggest interest rate hike in 14 years, indicating that the is making bold moves to mitigate the country’s cost of living crisis.
Banks and building societies will be looking to pass on this rate increase to their cash savings customers, who are seeing diminishing returns due to the inflation.
As of last week, inflation is at 9.9 percent which is a slight dip from the 10.1 percent reported the month before.
Despite this boon for savers, borrowers and homeowners will have to pay an extra £3.1billion in interest payments for those on standard variable rate and tracker mortgages.
Alastair Douglas, the CEO of TotallyMoney, noted that another interest rate rise will “pile pressure” on over two million homeowners as the cost of living continues to go up.
Bank of England has raised interest rates
Reacting to the announcement, economist Thomas Pugh from RSM UK said: “Today’s 50 basis point rise in interest rates means the Bank of England is probably only a little over halfway through its tightening cycle.
“The Monetary Policy Committee (MPC) is unlikely to pause its tightening cycle until there is evidence that wage growth, currently at 5.5 percent year on year, is starting to come down to closer to the three percent year on year that the MPC thinks is consistent with its two percent inflation target.
“That will require the unemployment rate to rise significantly from its current 48 year low of 3.6 percent.”
Originally, financial analysts had expected the base rate to go up by 0.75 percent.
The Monetary Policy Committee voted 5-4 in favour of raising interest rates which indicates the financial institution is split in its opinion.
Alice Haine, a personal finance analyst at Bestivest, believes this is a sign that the bank is “serious about getting inflation back down to more palatable levels”
She added: ““The Bank of England’s decision to raise the benchmark lending rate by 50 basis points at this month’s meeting, delayed a week by the mourning period for Queen Elizabeth II, marks the first-time interest rates have risen by 0.5% over two consecutive months since December 1994.”
Charlie Huggins, the head of Equities at Wealth Club, noted that the financial institution is “stuck between a rock and a hard place”.
He explained: “A gentler approach to rate rises risks sending sterling into a tailspin, and seeing inflation get even further out of control.
“But too much tightening could easily choke the life out of the economy, without significantly easing the cost-of-living crisis. It’s a horrible balancing act, with seemingly no good outcomes.”
The central bank is trying to mitigate the damage caused by inflaiton
Laura Suter, AJ Bell’s head of personal finance, cited how the financial institution is mirroring similar decisions taken across Europe and the United States.
Prior to the announcement, Ms Suter explained: “The Bank of England could be poised to increase interest rates by their largest ever amount, with a 0.75 percentage point increase marking a record rise.
“Markets are prepared for a bumper hike from the UK’s ratesetters, to follow in the footsteps of US and European central banks.”
Ray Black, the managing director of Money Minder, shared how savers will be impacted by today’s decision from the Bank of England.
Interest rates are being raised by the Bank of England to combat inflation
Mr Black said: “Increasing interest rates have an effect on all areas of the economy. Interest rate increases are often good news for banks and those people with cash savings who will receive a higher return on their money.
“However, with inflation in double digits and the best easy access savings accounts paying less than two percent and the worst paying less than 0.5 percent, there would need to be many more increases in rates before savers are getting an inflation beating return on cash, and it seems very unlikely to happen in the near term.
“The long term low interest rate environment that we have been used to over the past couple of decades has meant that banks have not been able to generate the profits they used to enjoy on lending, because their margins were reduced.
“However, when interest rates rise they can charge their borrowers more which should increase profits and in turn their share price.”
How have interest rates risen in recent years?
Chris Beauchamp, the chief market analyst at IG Group, emphasised that the Government will need to react strongly in its Budget to calm concerns.
He said: “The doves at the Bank of England have won out for now, moving rates up by just 50 basis points.
“But with the inflation forecast actually cut back slightly perhaps there is ground for the BoE’s hawkishness to drop back a touch.
“Once again the Bank of England’s caution has hit sterling, which has dropped again following the decision. Perhaps tomorrow’s Government statement will give sterling traders something more positive to think about.”
Sarah Coles, Hargreaves Lansdown’s senior personal finance analyst, noted that the Bank of England views tomorrow’s mini-Budget as a “massive unknown quantity”.
On potential future rate hikes, she said: “It’s only when the plans are laid out that the Bank will be able to crunch the numbers and assess what it means for the future path of inflation – and therefore for rate rises.
“Given the tax cuts we’re expecting to see, the Bank is likely to assess that the measures will push inflation up again, which in turn makes rate rises more likely in the next meeting.
“Certainly the market is expecting more substantial rises – with rates hitting anything between 3.5 percent and 4.75 percent in mid-2023. However, for now, we’ll have to wait and see.”