Bank of England raises interest rates to 1.0%

The Bank of England's Monetary Policy Committee has voted to increase the Bank Rate from 0.75% to 1.0%. This marks the fourth consecutive increase as the Committee tackles rising inflation.

Related topics:  Finance News,  Bank of England
Amy Loddington
5th May 2022
white arrow painted on concrete

The rate hike was widely anticipated: a member of the Monetary Policy Committee, Catherine L Mann, said - during a Bank of England webinar at the end of April - "monetary policy needs to keep inflation expectations anchored; by doing so now, less tightening will be required later, when demand may still be weak".

The move was not unanimous - 6 members voted for the increase to 1.0%, while 3 members voted for a higher increase to 1.25%.

The Committee cited higher goods and energy prices, Russia's invasian of Ukraine affecting prices, and Covid as influences on rising inflation- in March, prices has risen by 7% compared to the previous year, much higher than the Bank of England's 2.0% target.

The Committee has indicated it also intends to consider the process of selling UK government bonds, although it affirmed that any sales would be done based on economic circumstance and in a gradual manner, with a further update on its proposed strategy to be given in August meeting minutes.

The report continued:

"The Bank of England can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation."

"But we do have tools to make sure inflation comes back down to our 2% target. The main tool we use to bring inflation down is to increase interest rates."

"We raised the UK’s most important interest rate (Bank Rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022, and then again to 0.75% in March."

"This month we have raised Bank Rate to 1%. We expect inflation to fall back next year and be close to our target in around two years. We may need to increase interest rates further in the coming months. But that all depends on what happens in the economy. In particular, we will be watching closely what is likely to happen to the rate of inflation in the next year or two."

The finance industry was quick to react to the news. Here's what they're saying: 

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said: “Loyal savers who have an easy access account with one of the biggest high-street brands are seeing little benefit from base rate rises, as many of these brands have passed on just 0.09% since December 2021 and none have passed on all three base rate rises, which equate to 0.65%. The average easy access rate has risen by 0.20% since the start of November 2021, so there is still room for improvement across the sector, but as rates rise, comparing deals and switching is wise.

"As we have seen before, it can take a few months for customers to see any benefit from a base rate rise but there is no guarantee that savings providers will increase their rates. Should savers see 0.25% passed onto them, it would mean receiving £50 more a year in interest based on a £20,000 investment.

“The top rate tables for easy access accounts are experiencing some rivalry from challenger banks, which is great news for savers who prefer to keep their cash close to hand. There is no certainty for a top rate deal to last very long, but consumers can easily switch between accounts if they desire. If savers are using easy access accounts as a safety net, they must check that they will not get penalised for withdrawals and ensure it’s still offering a competitive return. Overall, it is positive that savings rates are rising and hopefully will continue to do so in the weeks to come.”

Steve Seal, CEO, Bluestone Mortgages, comments: “Despite ongoing inflationary pressures, today’s decision will be a huge blow to consumers and borrowers across the country, many of whom have already been feeling the squeeze on their personal finances. This rate rise will no doubt put further pressure on these individuals.

“However, would-be and existing borrowers should remember that hope is not lost, and this is where the value of advice is paramount. Brokers, now more than ever, have a vital role to play in demonstrating the routes to homeownership and solutions available to meet their needs. Whether that be locking in a fixed-rate mortgage, remortgaging, or signposting consumers to a lender who can meet their circumstances, these professionals are on hand to help people make their homeownership dreams a reality.”

Vikki Jefferies, Proposition Director, PRIMIS, comments: “The Bank of England has decided to yet again raise the base rate to its highest level in 13 years, as it seeks to tackle record inflation. It will come as no surprise that this decision has been made, with consumer price inflation hitting a 30-year high of 7 per cent in March, and households continuing to struggle with soaring energy bills alongside broader increases in the price of goods and services.

“The continued rise in interest rates poses major questions for the millions of homeowners who have bought at rock bottom rates in recent years – especially those on a two-year fix, who could be in for a shock in the coming months. Brokers will now need to be more proactive than ever to secure the best outcomes for their customers. This is particularly the case for those who have complex financial situations, and brokers should act quickly to help these customers to find the most appropriate and affordable products that fit their current circumstances.”

Sarah Pennells, Consumer Finance Specialist at Royal London, says: “Interest rates have increased for the fourth time in six months with the latest hike taking the base rate to its highest level since 2009, rising by a quarter-point from 0.75% to 1.00%.

“Interest rates rose in December for the first time since 2018 and the Bank of England hasn’t paused for breath since, with four successive rises signalling the end of a sustained period of ultra-low rates.

“Savers are being hit with a double whammy. Those who can leave their savings untouched will still lose money in real terms, despite today’s rate rise, because the return on cash held in savings is significantly below the current high level of inflation. The rise in the cost of living, outpacing the rise in wages, is also forcing others to dip into their savings, with a quarter (24%) of full-time workers in the UK looking to access some or all of their short term savings to help them get by day to day.

“A fall in disposable income also means we’re spending more and saving less. As costs continue to rise, it’s turning on its head the situation created during the pandemic where millions became ‘accidental savers’ to a situation where inflation is forcing us to become ‘accidental spenders.

“Alongside interest rates, sharp rises in household bills and the general cost of living is a huge concern for 95% of adults in the UK, leaving many wondering how they’ll make ends meet. Worryingly, a fifth (21%) of people plan to borrow their way out of trouble, at a time when the cost of borrowing is escalating.

“Mortgage borrowers on a variable rate have barely had time to deal with the effects of the last rate rise and are now faced with a further increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month. While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral.”

David Johnson, managing director of independent property consultants INHOUS, says: "In the mainstream housing market, there is no doubt that the latest in this series of interest rate hikes is going to impact homeowners. Many of the people we speak to feel that a recession is inevitable.

"In London, the interest rate hikes will impact those buyers who purchased in the past five or six years and paid a premium to do so. Between the £2 million to £8m price bracket, the market was very competitive, with the majority of buyers needing finance and paying strong prices to secure their homes. We could see these homeowners struggle at a later stage if there are several more interest rate hikes, but this won’t happen imminently. It also depends on what finance they took out; if they opted for a medium or longer-term fixed-rate mortgage, they may be ok but if they opted for a variable rate, it could be a nervous period for them.

"As far as high-net-worth and ultra-high-net-worth buyers are concerned, we don’t expect to see much of an impact. The majority of our clients are cash buyers or have the cash reserves but choose to take out finance. Interest rate hikes are not even a subject of discussion for these buyers. With buyers still outnumbering sellers in London, property values should remain strong."

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: "With the markets already pricing in this rate rise, it comes as no surprise. Lenders have increased mortgage rates in recent weeks with little or no notice, making it difficult for borrowers as any hesitation may mean missing out on the best deals.

"The Bank of England has to carefully balance the need to control inflation with the wider economic challenges posed by rising interest rates. Even with this latest rise, we remain in a low-interest rate cycle and expect that to be the case indefinitely.

"For every £100,000 on a variable-rate mortgage, a quarter-point rate rise adds £250 a year. Those borrowers on variable-rate deals may want to consider taking out a fixed-rate mortgage – while these are getting more expensive, some of the longer-term fixes are particularly competitively priced. However, borrowers must be careful not to fix for longer than they are sure about or may incur a hefty early repayment charge to get out of the mortgage early.

"The purchase market is still active although the housing market has settled down a little and the froth has gone. Activity in the remortgage market is brisk with some borrowers considering paying the penalty to leave their existing deal early in order to secure another product before prices rise further. This can be worth doing but it is important to ensure any savings you make to your mortgage payments outweigh the costs involved. Rates can be booked up to six months before they are required and we are getting a lot of interest from motivated borrowers in doing this."

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