The Bank of England (BoE) has announced it is increasing its base interest rate to 0.5%.

At its latest meeting, the Bank’s Monetary Policy Committee (MPC) voted by a majority of 5-4 to increase the rate by 0.25 percentage points, up from 0.25%.

This follows the decision in December which saw the BoE increase rates for the first time since March 2020, when it had slashed the base rate to a historic low of 0.1% as the UK was hit by the first wave of COVID-19.

In December, the 12-month CPI inflation rate climbed from 5.1% in November to 5.4%, which was almost one percentage point higher than the Bank had expected at the time of its November Report. The BoE has forecast that inflation will increase further in the coming months, hitting close to 6% in February and March, before peaking at around 7.25% in April.

“Given the current tightness of the labour market and continuing signs of greater persistence in domestic cost and price pressures, the Committee judges that an increase in bank rate of 0.25 percentage points is warranted at this meeting,” the MPC stated.

Reacting to the rate increase, PRIMIS Mortgage Network proposition director, Vikki Jefferies, said: “It is not surprising that the BOE has today decided to raise the base rate by another 0.25%, especially with consumer price inflation reaching 5.4% in December, its highest since March 1992.

“For many borrowers, this further rise may not have an immediate impact as most are on fixed-rate mortgages. However, for those not on fixed rate mortgages, now may be good opportunity to switch to a fixed rate deal, before rates change again later this year.”

However, Pitch 4 Finance founder and CEO, Miranda Khadr, was critical of the BoE’s announcement.

“I think it is irresponsible for the MPC to raise the base rate this month, despite the rise in inflation,” Khadr said.

“The cost of essential day-to-day to living requirements such as food, gas and electricity, have been going up and more people are struggling to get by. There are too many things happening at once for rates to go up now. If you add in tax hikes that are due soon and higher interest rates people’s finances will suffer even more.
 
“Rising debt is also a worry with BoE data released this week showing annual credit card debt increasing by 2% in December. Other forms of consumer credit such as car and personal loans were up by 1.1%. Raising interest rates will only add to this.”

Just Mortgages national operations director, John Phillips, added that while the increase could attract negativity, the BoE’s decision was “hard to argue with”.

“Although there may be some negativity around the decision to increase base rate, it will not dampen the desire to buy properties,” he commented.

“UK inflation leapt to 5.4% in December – the highest level in nearly 30 years – so the decision by the MPC is hard to argue with. Mortgages will become slightly more expensive, however competition between lenders should keep rates relatively low.

“The increase is unlikely to put anyone off buying and it highlights the need for advice from brokers. Fixing for longer terms may become the norm as interest rates are anticipated to continue rising in the coming years.”

The BoE’s next interest rate decision is due on 17 March.

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