The Bank of England has raised interest rates by a half point to 5% as it intensifies its efforts to tackle stubbornly high inflation, adding to the strain on households struggling with soaring mortgage costs.
In what will be seen as a major move, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008. Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
Rishi Sunak insisted after the decision that his government would “remain steadfast in its course” to curb inflation. The prime minister faces growing calls to intervene as millions of households feel the strain from surging mortgage costs.
“The reason interest rates are going up is because inflation is too high,” he told the Times CEO summit. “This is something that makes everybody poorer, that’s what inflation does. That’s why we’ve got to grip it, we’ve got to reduce it and interest rates are a part of that.
“Now, I always said this would be hard – and clearly it’s got harder over the past few months – but it’s important that we do do that.”
The latest rise in borrowing costs comes after figures on Wednesday showed inflation remained unchanged at 8.7% in May, driving expectations that the central bank would have no choice but to respond. Inflation was expected to fall to 8.4%, which would still have been well above the Bank’s 2% target.
Amid a growing sense of alarm over stubborn inflationary risks, the MPC said: “There has been significant upside news in recent data that indicates more persistence in the inflation process, against the backdrop of a tight labour market and continued resilience in demand.”
The Bank said that it would continue to watch for persistent inflationary risks, and would push interest rates higher if necessary. Financial markets reacted to Thursday’s increase by betting the central bank would be forced to raise its base rate above 6% before Christmas.
Experts warned the shock and awe approach from the central bank to squeeze high inflation out of the system risked tipping Britain’s economy into recession, as tougher increases in borrowing costs reduce households’ disposable income and crush consumer demand for goods and services.
“Investors are trying to assess whether today’s big bazooka might be enough to stem further rate hikes or whether more will still be necessary,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“The prospects of the UK avoiding a recession look very slim.’’
Rachel Reeves, the shadow chancellor, accused Sunak and the chancellor, Jeremy Hunt, of “burying their heads in the sand and failing to clean up the mess this Tory government has made”.
“Families across Britain will be desperately worried about what today’s interest rate rise might mean for them,” she said.
Hunt said the government’s resolve to bring down inflation was “watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.”
Seven members of the Bank’s rate-setting panel, including the governor, Andrew Bailey, voted for a half-point increase, outnumbering two members – the independent economists Swati Dhingra and Silvana Tenreyro – who pushed for interest rates to be held steady amid concern over the impact on the economy from 12 previous hikes.
The move comes as households across the country face a surge in mortgage repayments as the impact from earlier rate hikes feeds through to the cost of home loans, in a development heaping pressure on the government as millions of families struggle with soaring bills.
In a fortnight of turmoil in the mortgage market, high-street lenders and building societies had rushed to pull hundreds of cheaper deals on new home loans before the Bank’s latest decision, while pushing up the cost of a typical two-year fixed-rate mortgage above 6% – the highest level since Liz Truss’s disastrous mini-budget last autumn.
Borrowing costs have risen steadily since the Bank first began raising rates from a record low of 0.1% in December 2021. More than a quarter of mortgage holders are expected to come to the end of cheap deals struck before this time – leaving millions of people facing a “mortgage timebomb” of higher borrowing costs.
Writing in a letter to the chancellor, Bailey warned that the large share of households who were on cheaper fixed-rate mortgages meant “the full impact of the increases in Bank rate to date will not be felt for some time”.
Threadneedle Street had moved earlier this year to begin winding down its rate-hiking cycle, cutting the pace of interest rate increases from 0.5 percentage points to smaller quarter-point increases from March. However, the return to a tougher stance comes after several shock readings from the economy highlighted the risk of stubbornly high inflation.
The MPC warned there were signs of “second-round effects” setting in, as the initial inflationary burst seen after the Covid pandemic and Russia’s invasion of Ukraine becomes increasingly entrenched in the economy. It said this could be seen in domestic price increases set by companies, and by pay settlements for workers being maintained at higher levels than was consistent with its 2% inflation target.
Although noting that some future indicators of pay growth and good prices had weakened, there had also been “recent upside surprises” to justify its tougher half-point increase.
