The Bank of England’s monetary policy committee voted 7-2 in favour of a controversial 50 basis point increase, raising the bank rate to 5.0 per cent, as a response to heightened levels of inflation.
Aviva Investors head of rates Ed Hutchings says: “The Bank of England hiked rates a further 0.50 per cent to make it a staggering 13 hikes in a row. Although the size of the hike was somewhat unexpected, it should not have been too much of a surprise in light of recent inflation and employment data.
“Once again, the split vote on the decision shows that some MPC members believe taking the rate from 0.10 per cent to 5.0 per cent without a pause along the way is taking things too far. Further to this, with the market still priced for a further 1.0 per cent of hikes, it could still be some time before we do actually see a pause. There’s little doubt that the next six to nine months will prove tough for the UK economy. Today’s hike should now see Gilt yields supported as it is likely we are closer to the end of the hiking cycle. However, with growth likely to get hit going forward, Sterling could face some weakness.”
Hymans Robertson head of capital markets Chris Arcari says: “Today’s rate rise was more than expected and market expectations are for rates to peak at around 6 per cent p.a. early next year, before falling back but remaining higher for longer, with the market also suggesting rates will stay above 4 per cent p.a. for the next 4 years. Much of this expected tightening is already being reflected in mortgage rates, which will begin to bite harder as more and more homeowners roll off their fixed rate periods over the next few years.
“The latest run of upside inflation surprises has seen interest rate expectations rise significantly and has caused further indigestion in the gilt market, which has been vulnerable to disappointing inflation data amid BoE gilt sales (quantitative tightening) and heavy issuance to fund a large government deficit.
“One can imagine a benign way for goods inflation to fall, such as an easing in supply chains, falling commodity prices and re-orientation of demand from goods to services. However, labour-intensive service sector inflation does call for further action from the Bank of England, as it is a gauge of the domestic-driven inflation pressure the Bank can do something about. The Bank needs to tighten monetary policy to slow economic activity to the extent that demand for labour is reduced, and hence labour market tightness and wage pressures ease.”
Standard Life managing director for customer Dean Butler says: “The Bank of England’s move to raise the base interest rate another 0.5 points, to 5 per cent, is good news for those whose savings outweigh their borrowing but comes as a real blow to anyone with debt. This includes the significant minority of retirees and those approaching retirement who still have credit cards or a mortgage to pay off. The costs are also likely to filter through to many of those who rent their property too. It’s difficult to believe how different things were until very recently – shockingly, rates only reached 1 per cent last May. The speed and severity of the change has taken everyone by surprise, and people who were financially comfortable in the spring of 2022 might now find themselves struggling and having to reassess their plans, particularly as rate rises have been coupled with double-digit inflation.
“People who were planning to retire in the near future but still have mortgages or other debts face a tricky decision as the cost of borrowing continues to rise. The State Pension by itself isn’t enough for a comfortable retirement even without housing costs or other debts, and many don’t have enough saved in private pensions to bridge the gap. If you’re wondering what to do next it’s always worth taking advice if at all possible, speaking to your pension provider or your HR department at work, or using the Government’s free Pension Wise guidance service.”
LV= chief investment officer Adam Ruddle says: “The Bank of England’s decision to raise interest rates by half a percentage point is a clear sign that the inflation beast is going to be harder to tame in the UK. The market was expecting a quarter-point rise given the Bank’s forward guidance but clearly, a larger increase is warranted given the stubborn inflation data – particularly core inflation which has reached a 20-year high. A larger-than-expected increase now should give the Bank some flexibility in the months to come.
“The danger (and increasingly the intention) is that such a large increase in interest rates will hurt the UK economy, increase mortgage payments and squeeze living standards further. Continuing to increase interest rates is a clear signal that a recession is required to vanquish inflation. I believe the Bank is more likely to revert to smaller quarter-point hikes over the next few months. At this point, the data does not suggest there will be any rate cuts over the next 18 months which leaves the UK as an outlier compared to the US and Europe where rate cuts are expected as their inflation is more under control.”
Evelyn Partners partner in financial planning Gary Smith says: “Expect more mortgage market mayhem after this big bazooka rate hike. Lenders were probably already pricing in a 25 basis point move, but the repricing of home loans looks likely now to be more dramatic and protracted.
“With the benchmark interest rate undergoing a step-change to a level not seen since September 2008, the coming weeks are likely to see a procession of raised loan rates – and a succession of eye-watering estimates of how much monthly and annual loan payments will increase as borrowers come off their cheap fixed deals.
“There are some tactics borrowers can use to keep their monthly mortgage payments down, like taking out a longer-term loan like a 30 or 35-year product or asking to switch part of their loan to interest-only. But they should go in with their eyes open and recognise that there is an element of kicking the can down the road with these options – costs will overall be higher and the loan must be paid off at some point.
“Such tactics can perhaps make more sense for younger borrowers who have time to overpay and get their home loan back on an even keel when the rates environment is more amenable, although even they must be aware will be building up equity in their property more slowly.
“Those struggling with the need to take a call on where the base rate will go in the coming year or two – in order to decide on a tracker or a fix – can also compromise by asking to have part of their mortgage fixed and part variable rate.
“In all this, a good mortgage broker can be very useful, not least because they are likely to handle the admin and communications with lenders more quickly and efficiently and therefore grab products whose shelf-life might be very short.”
IG Group chief market analyst Chris Beauchamp says: “The BoE has come down on the side of a 50bps hike, in a move that seems to set the tone for the next few meetings. The fight against inflation clearly has to step up a gear, and the task now for the BoE is to get ahead of the curve once again. A nod to ‘persistent inflation’ should put everyone on notice that Bailey and co have overcome their reticence about more aggressive hiking.”