The Bank of England has raised interest rates to 1.75% from 1.25% – the highest level since January 2009. The UK will enter five consecutive quarters of recession with gross domestic product falling as much as 2.1%, the Bank said.
Consumer Prices Index inflation is expected to peak at 13.3% in October, the highest level since September 1980, the Bank said.
The Bank of England’s monetary policy committee (MPC) of nine members voted eight to one in favour of a rise to 1.75%.
But one member of the MPC – Silvana Tenreyro – was out-voted in calling for a quarter point rise to 1.5%. In minutes from the rates decision meeting, the Bank said the majority of the MPC felt a “more forceful policy action was justified”.
It said: “Against the backdrop of another jump in energy prices, there had been indications that inflationary pressures were becoming more persistent and broadening to more domestically driven sectors.”
“Overall, a faster pace of policy tightening at this meeting would help to bring inflation back to the 2% target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening cycle later,” the Bank added.
Tim Bannister, Rightmove’s Housing Expert, said: “Today's 0.5% increase in the base rate takes average monthly mortgage payments for new first time-buyers to over £1000 if lenders pass on the rate rise to new applicants. This is approximately 40% of the average first-time buyer salary, a level not seen since 2012.
"First-time buyers trying to get onto the ladder are currently facing average monthly mortgage payments that are 20% higher than the start of the year due to rising interest rates and asking prices, and that’s assuming they’ve been able to raise a large enough deposit. A new record first-time buyer asking price of £224,943 means that a 10% deposit for a first-time buyer type home is now 57% higher than it was ten years ago, while average salaries have only increased by 31%.
"For all home-owners, average mortgage rates for a two-year fix are just over 3% compared to nearly 6% ten years ago, so they are still historically low, and those currently on a fixed-rate will not be impacted yet. However, as rates creep upwards and with the wider economy uncertain, people may look for some financial certainty by locking in longer mortgage terms before they rise again."
Richard Lane, StepChange debt charity's Director of External Affairs, said:“While higher interest rates may be needed to dampen down inflation, right now struggling households are having to cope with both. For many people, the overall cost burden simply isn’t sustainable, and with energy bills set to rise even further than previously expected, the pressure won’t be easing off any time soon.
“Affordability and debt are going to need to be top of the list for the next Prime Minister. In the meantime, anyone struggling should visit StepChange’s dedicated cost of living hub, which is full of useful pointers on how to start dealing with current financial pressures. Home-owners worried about mortgage arrears can talk to our in-house mortgage arrears advice team, and we also have a dedicated mortgage advice service which is free to access for anyone, whether or not they are experiencing debt problems.”
Richard Ollive, Specialist Financial Adviser at Wesleyan, said: “Today’s decision by the Bank of England to hike interest rates by 50 basis points to 1.75% is its largest since 1995 and will have a profound impact, particularly on homeowners.
“Figures show that just over a fifth of all mortgage holders in the UK are on variable rate deals, meaning around 1.9 million homeowners will be hit with a rate rise, and potentially end up paying hundreds of pounds more in annual repayments.
“As a result, many of those will now be looking at their deals – possibly for the first time in a long time – and considering whether they would be better off remortgaging for a fixed deal instead. While nobody can predict what will happen next with any certainty, speaking to a professional adviser is always good advice before making any long-term financial decisions.”
The Bank said: “Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting.
“That largely reflects a near-doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs.
“As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term.
“CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”
It added: “The United Kingdom is now projected to enter recession from the fourth quarter of this year.
“Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.”
