Bank of England announces further interest rate increase to 1.25%

The Bank of England (BoE) has confirmed it is further increasing its base rate to 1.25%.

Interest rates are now at their highest level since January 2009, following a fifth consecutive increase.

At its latest meeting, the Bank’s Monetary Policy Committee (MPC) voted by a majority of 6-3 to raise interest rates by 0.25 percentage points from 1%, following on from its May meeting when the base rate was increased by the same amount up from 0.75%.

MPC members who were in the minority were in favour of instead increasing the base rate by 0.5 percentage points, to 1.5%.

In the MPC’s central projections in its May Monetary Policy Report, UK GDP growth was expected to “slow sharply” over the first half of the forecast period. The BoE is now expecting GDP to fall by 0.3% in the second quarter as a whole, which is weaker than anticipated at the time of the May Report.

This comes as 12-month CPI inflation rose from 7.0% in March to 9.0% in April, a figure which is expected to average slightly over 10% at its peak in Q4 2022. The MPC, which sets monetary policy to meet the 2% inflation target in a way that helps to sustain growth and employment, is now warning that CPI inflation is projected to fall to “a little above the 2% target in two years’ time”.

“The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium-term, in line with its remit,” the BoE stated.

“The scale, pace and timing of any further increases in bank rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures. The Committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

Commenting on the latest base rate rise, financial expert at M&G Wealth, Les Cameron, said: “While today’s announcement is no surprise, what remains to be seen is whether this rise will translate to higher rates available to savers or to increased borrowing costs.

“With the current high levels of inflation we’re experiencing, a modest increase to savings rates would still mean that most cash or near-cash savers, for example National Savings & Investments, would see their wealth being eroded in real terms.

“Of course, many of those with cash savings are pensioners who spend a higher proportion of their savings on energy costs, which we know are increasing at a much higher rate even than the headline inflation rates. The increasing cost of living will mean those repaying debt, that is not on a fixed rate, will no doubt feel the pinch even more if rates rise.”

Legal & General Surveying Services managing director, Kevin Webb, highlighted the impact of the BoE’s decision on the housing market.

“Repayments will rise for those on tracker mortgages and others who need to find a new fixed rate product,” Webb commented. “A rise in rates could also threaten to put the brakes on the housing market’s growth, as prospective homeowners trying to step onto the ladder decide instead to hold off buying and try to balance the books during a time when the cost of living is going up.

“For those planning to buy a home, it is likely to be the single biggest transaction they make during their lifetime, and they will naturally want to ensure they are as comfortable as they can be when making the purchase. Today’s news makes it all the more important to seek the expertise of surveyors, who can give immense value and reassurance to homebuyers.”

Co-founder and COO of new lender Perenna, Colin Bell, added: “Regrettably, recent incremental base rate hikes have so far had little impact in curbing rocketing inflation. Pressure for a larger base rate hike has also been mounting for weeks, but this would be nothing but damaging to first-time buyers, borrowers on tracker mortgages, and homeowners looking to remortgage.

“Interest rates are highly unpredictable and often stress-inducing. Consumers worried about today’s decision should certainly explore flexible long-term fixes as a way of dodging the rollercoaster of remortgaging or repaying debts in these highly uncertain conditions.”

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