Certain debtors will face immediate payment increases as the Bank maintains its inflationary pressure despite a three-way split on its monetary policy committee.
The Bank of England has increased interest rates by 0.5 percentage points, its ninth straight hike as it continues to combat inflation.
The monetary policy committee (MPC) decision increased the bank rate to 3.5 percent, a level not seen since the 2008 financial crisis.
Inflation soared to a 41-year high of 11.1% on the back of surging oil and food prices, prompting the Federal Reserve to raise interest rates by 0.75 percentage points last month.
Given the recent decline in the consumer price index (CPI) inflation gauge to 10.7% announced on Wednesday, economists and financial markets broadly anticipated a rate hike on Thursday.
It mirrored the rate change announced by the US Federal Reserve on Wednesday evening and was mirrored by the European Central Bank, which raised its primary deposit rate from 1.5% to 2%.
The voting on the nine-member MPC made for intriguing reading, as it was divided three ways, with financial commentators attributing a one-cent drop in the pound’s value versus the dollar, to $1.23 (£1), after the vote to contradictory messages.
Two favored no change, while Catherine Mann, an economist, advocated a repeat of November’s increase. The remainder, including governor Andrew Bailey, supported the 0.5% increase.
While the most recent inflation rate increased optimism that the core cost of living index had reached its top, the bank continues to raise interest rates since inflationary pressures remain in the economy despite its declaration that the United Kingdom is already in recession.
Excluding the period of the epidemic, independent data released last week indicated that basic earnings grew at their quickest rate since 2001, which would have alarmed policymakers.
The Bank stated, “The labor market remains tight, and there have been indications of inflationary pressures in domestic prices and wages, which could signal higher persistence and hence justify a more robust monetary policy response.”
In an economy where inflation is already squeezing margins, increased interest rates will merely increase the cost of borrowing money.
Immediate suffering for certain homeowners
Those with tracker or standard variable rate (SVR) mortgages will be hit the worst.
According to Moneyfacts, a Bank rate increase of 0.5 percentage points on the current average SVR of 6.40 percent would increase total repayments by around £1,509 over two years.
The rate increase is also likely to be reflected in upcoming fixed rate arrangements, which are still rebounding from September’s mini-budget market chaos.
The Bank warned earlier this week in its Financial Stability Report that the average monthly mortgage payment will increase by £250, putting more people at risk of insolvency in the coming year.
The financial markets expect the Bank rate to reach 4.6% during the next six months.
Rachel Springall, a finance expert at Moneyfacts.co.uk, stated, “This latest base rate increase will be discouraging to borrowers who are already suffering a cost of the living problem and recent volatility in mortgage interest rates.
“Consumers may heave a sigh of relief as fixed mortgage rates have begun to decline in recent weeks, and they may hope that this trend will continue.
“However, the cost to acquire a new fixed arrangement is significantly higher than people may realize, since the average two- and five-year fixed rates have risen by more than 3 percentage points over the previous year.
“The irregular behavior of mortgage pricing necessitates that consumers seek counsel to examine all available possibilities,” she said.
Chancellor Jeremy Hunt stated on the Bank’s action, “High inflation, exacerbated by Putin’s war in Ukraine, continues to affect countries around the world, eroding people’s paychecks and driving up food and energy prices.
“I am aware that this is a difficult time for many, but we must stay to our strategy and work in tandem with the Bank of England as they take measures to return inflation to target.
“The sooner we gain control of inflation, the better. Any move that risks permanently entrenching high prices in our system would simply prolong the suffering for everyone, stifling any economic recovery prospects.”
