Misery for millions as interest rates hiked 0.5 per cent to reach highest level since 2008 financial crisis
22 September 2022, 09:38 | Updated: 22 September 2022, 12:57
Millions of homeowners were hit by yet another bruising rise in mortgage bills after the Bank of England increased its interest rate by half a percentage point.
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The Bank of England has forecast that the UK economy is already in recession, and said that the UK's gross domestic product shrunk by 0.1% in the third quarter of this year.
The Bank predicts that inflation will peak at just under 11% in October, but is still concerned for the cost of living, saying: "Energy bills will still go up and, combined with the indirect effects of higher energy costs, inflation is expected to remain above 10% over the following few months, before starting to fall back."
The latest hike lift the Bank’s key benchmark rate from 1.75% to 2.25%, the highest it has been since December 2008.
The latest move will add £88 a month to the cost of a typical £300,000 London mortgage, lifting the monthly repayment to £1,842, while three million more people approaching the end of their terms now face huge increases in their bills when they have to remortgage.
The main lenders have been repricing their fixed deals in recent days in anticipation of the Bank's move.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "[This is] a considerable increase in monthly payments for those on variable-rate mortgages. Coming on the back of six interest rate rises since December, plus higher energy bills, some households will really struggle.
Money markets are predicting that the Bank will have to go further and raise interest rates to a peak of 4.5% next year, but Mr Harris believes that approach risks causing 'greater problems':
“We don’t believe rates will or should go much beyond 3 per cent, despite fears that they could go higher. If the Bank of England were to hike interest rates to say 4 or 5 per cent, it risks causing greater problems than those it is attempting to control."
If rates did rise to five percent, it would be higher than in both the US and the Eurozone.
The latest rise comes before a mini-budget due tomorrow, which is expected to contain a series of measures to reduce levies and cut regulations, in an attempt to stimulate growth.
The chancellor, Kwasi Kwarteng is expected to announce more than £30 billion worth of tax cuts, as the government freezes corporation tax, reverses the rise in national insurance and cuts stamp duty.
Sir John Gieve who served as Deputy Governor for Financial Stability of the Bank of England from 2006 to 2009, suggested that the Bank and the government are pulling in different directions:
“It does complicate things. [The Bank] will have to arm itself to push interest rates up even a bit faster than it had planned. The Bank of England is worried about inflation, it’s a massive overshoot. Demand in the economy is outstripping supply.
“They are trying to slow down the economy. The rhetoric we’ve heard so far from the new government is that they want to speed it up by increasing borrowing.”
Markets had thought the Monetary Policy Committee (MPC) will increase rates by 0.75 percentage points to 2.5 per cent.
It would be the highest interest rate that the UK has had since the financial crisis, and the seventh time in a row the rate has been raised.
In December 2008, the base rate was slashed from 3 per cent to 2 per cent.
It would also be the highest single increase to interest rates since 1989.
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"Investors think the most likely outcome is that the MPC will increase the Bank rate by 75bp (0.75 percentage points) on Thursday," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
But he said that economists are expecting a smaller rise, to 2.25 per cent - the same 0.5 percentage point change as the Bank's last hike.
"For a start, hawkish surprises from the MPC have been far less common than dovish ones over the last year," he said.
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"In addition, Governor Bailey openly referred to a 50bp hike ahead of the August meeting, but has not given markets a nudge to price-in a 75bp hike.
"We think that the MPC still will deem a 50bp increase to be consistent with its pledge to act 'forcefully', if it sees signs of more persistent inflationary pressures."
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ING economist James Smith said that the Bank of England will have to react to recent falls in the price of the pound.
Sterling hit a new 37-year low against the dollar on Friday.
"The Bank of England meeting is crucial," he said.
"It will tell us not only how worried policymakers are about the slide in sterling and other UK markets, but also how the Government's decision to cap household/business energy prices will translate into monetary policy."
"We narrowly favour a 50bp hike on Thursday, taking the Bank Rate to 2.25 per cent, although 75bp is clearly on the table and we would expect at least a couple of policymakers to vote for it."
He said that rates will likely rise again in November and December, hitting 3 per cent by the end of the year.
The decision to hike interest rates is a bid to keep inflation under control.
It is the best tool that the Bank of England has to steer inflation from its current level of 9.9 per cent back to its 2 per cent target.
But the decisions will also have major impacts on people's finances, not least those with mortgages who will need to start paying more for their home loans.
The MPC was originally set to announce its decision on September 15, but delayed this for a week due to the Queen's death.
