The Bank of England (BoE) has once again increased its base rate to now take interest rates to 5%, their highest level in 15 years.

Rates have risen by 0.5 percentage points on their previous level, a hike that many economic forecasters were not expecting.

The Bank’s Monetary Policy Committee (MPC), which sets monetary policy to meet the 2% inflation target, voted to increase the base rate for the thirteenth meeting in a row, having gradually increased rates since December 2021 when they sat as low as 0.1%. The Committee this time voted by seven votes to two in favour of a 0.5% hike, while the other two members had preferred to maintain the base rate at 4.5%.

According to the BoE’s latest statement, there has been “significant upside news in recent data” that indicates more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand.

The interest rate rise comes a day after figures from the Office for National Statistics (ONS) revealed that the rate of inflation in the year to May had stayed at 8.7%, the same figure it was in April, and a rate branded “stubbornly sticky” by experts from the financial services industry. The rate of food price inflation fell slightly, to 18.3% from April’s 19.0%, although this is still much higher than a year ago.

Chancellor, Jeremy Hunt, said this week that the Government would “not hesitate” in its resolve to support the BoE as it seeks to “squeeze inflation out of the economy”. Labour’s Shadow Chancellor, Rachel Reeves, has blamed the Government for failing to “get a grip” on inflation, however, while the Liberal Democrats Treasury Spokesperson, Sarah Olney, also highlighted that homeowners are now “facing the likelihood of even more interest rate hikes”.

Homeowners in particular will continue to be affected by rising interest rates as the knock-on impact on monthly mortgages payments is felt.

According to analysis by UK Finance, the impact of the 0.5% base rate increase will add £47.43 to the average monthly payment on a tracker mortgage, and an average £30.28 each month onto a lender’s monthly standard variable rate (SVR).

The banking body has also estimated that among UK homeowners, there are around 800,000 fixed rate deals ending in the second half of 2023, and around 1.6 million deals due to end in 2024, with those previously locked into lower rates now exposed to potentially remortgaging at far higher and damaging rates to monthly budgets.

Reacting to the latest base rate increase, managing director of capital markets and finance at LiveMore, Simon Webb, said: “The BoE’s MPC has been spooked by the unexpected inflation figures yesterday showing stalemate in consumer price inflation and a rise in core inflation. We are still waiting for the previous base rate rises to filter through to the inflation figures but the impact is slow and laborious.

“During the 13 years of low interest rates we had become used to, the Bank said that when rates do rise it will be a slow process, but the opposite has happened. The unprecedented thirteenth consecutive rise in the base rate in 18 months, with further rises anticipated, is a price Chancellor Jeremy Hunt is willing to pay as bringing down inflation is the Government’s ultimate goal.

“This latest rise is likely to be reflected in swap rates, which have almost doubled in the past year and therefore fixed rate mortgages will continue to be more expensive.”

Head of mortgages and protection at Just Mortgages, Ben Allkins, added: “Many would have hoped that the MPC would follow the Federal Reserve – as it often does – and pause its rate rising agenda. But while the Fed pauses to assess the impact of existing increases, the same cannot be said for the BoE with stubborn inflation clearly proving too much of a threat to not raise base rate once again.

“As swap rates respond to market expectations and lenders reassess their products, the role of brokers remains paramount to provide quality advice in a changing landscape. While we’d prefer to see base rate falling – like many – there’s no question a base rate change still serves as a reminder to consumers to seek advice and lock in a deal before it changes once again. That’s especially true for the wealth of remortgage business still up for grabs.”

The MPC’s next base rate decision is due on 3 August.

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