The Bank of England has unexpectedly pushed up interest rates to 5%, the highest rate in almost 15 years, as policymakers and the UK Government come under mounting pressure to control the cost of living crisis. The move is set to deepen the mortgage crisis as borrowing costs are hiked up for the 13th time in a row.
The 0.5 percentage point increase was the sharpest increase since February, surprising economists who had been expecting a smaller hike of 0.25 percentage points. Governor of the Bank of England Andrew Bailey said: "The economy is doing better than expected, but inflation is still too high and we've got to deal with it. We know this is hard - many people with mortgages or loans will be understandably worried about what this means for them, but if we don't raise rates now, it could be worse later."
It follows a higher-than-expected inflation reading in May as continued price rises forced policymakers into action in a bid to bring inflation down to the 2% target.
Calls are growing for the UK Government to do more to help mortgage borrowers who are set for a big jump in their monthly repayments.
Chancellor Jeremy Hunt said the Government's resolve to bring inflation down was "watertight". He said: "The lesson from other countries is that if you stick to your guns, you bring inflation down.
"Our resolve to do this is 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."
Mr Hunt and Prime Minister Rishi Sunak have so far dismissed suggestions that ministers could intervene.
However, Mr Hunt is set to meet with lenders on Friday as pleas grow for more to be done and met with consumer champion Martin Lewis on Wednesday, who said on Tuesday that a mortgage ticking time bomb is now "exploding".
Concerns over continued increases in wages alongside persistent goods and services inflation had already driven mortgage rates higher in recent weeks.
Financial markets have predicted that interest rates will strike a high of 6% by early next year amid warnings that 1.4 million mortgage holders will lose at least a fifth of their disposable income in additional repayments.
The central bank's Monetary Policy Committee (MPC) said on Thursday that it made the decision to hike rates more sharply due to "the background of a tight labour market and continued resilience in demand".
Seven members of the nine-person MPC opted for the increase to 5%, but two members called for rates to remain flat.
Responding to the increase in interest rates, Citizens Advice Scotland Financial Health spokesperson Sarah-Jayne Dunn said: “This decision is an attempt to cool the economy and slow inflation, which has hammered household budgets.
“But across the CAB network we are seeing people having to turn to commercial debt to meet essential living costs like food, energy, and shelter. People taking on new debt on these circumstances could see that line of credit cost even more. It becomes a vicious cycle, trapping people in rising debt."
Ms Dunn added: "The risk this also poses to homeowners set to come off fixed term deals, or on variable rate mortgages, is significant. This crisis is going to cast a long and looming shadow for years to come. With the looming risk of recession, essential costs going up and the cost of borrowing for many going up, it’s understandable that people will feel anxious and worried.
“People should know they aren’t alone, and anyone who needs help with their finances can get free, confidential advice from their local CAB, or online.”
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