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Bank of England increases interest rates by 0.5 percentage points

The Bank of England (BoE) has hiked UK interest rates by 50 basis points to 1.75% as it looks to combat runaway inflation, which it predicts will hit 13% later this year.

It marks the sixth consecutive increase from the central bank, and biggest interest rate hike in 27 years since the Monetary Policy Committee (MPC) was set up back in 1997. Interest rates are now at their highest level since December 2008.

The MPC voted 8-1 on Thursday, with Silvana Tenreyro the lone dissenter, voting for a smaller rise to 1.5%.

The move was widely expected by economists and financial markets, and comes amid mounting pressure to pick up the pace of interest rate rises.

Threadneedle Street has raised interest rates in 0.25 percentage point increments since December 2021, but pledged in June to act more “forcefully” in response to more persistent inflationary pressures.

The BoE raised interest rates to 1.75% on Thursday. Source: Bank of England

UK inflation hit 9.4% in the year to June, partly due to a 42% year-on-year increase in petrol prices, and an increase of almost 10% in food prices.

The Bank now expects inflation to peak to 13% before the end of the year — well above its 2% target — and for it to remain elevated in 2023.

It has also predicted that the UK will fall into recession in the last three months of this year, as well as contracting through next year. Lasting for five quarters, this would be the longest recession since after the 2008 financial crisis.

"Inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May monetary policy report and the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs," it said.

It added: "The United Kingdom is now projected to enter recession from the fourth quarter of this year.

"Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative."

Earlier in the week BoE governor Andrew Bailey said: “The committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary, act forcefully in response. Bringing inflation back down to the 2% target sustainably is our job, no ifs or buts."

The Bank also revealed plans to start selling the £850bn ($1tn) mountain of government debt amassed through a bond-buying programme during the pandemic and financial crisis.

What does this mean?

Many households will be now squeezed further due to the interest rate rise, including some mortgage-holders. Lenders might also be looking at increases to unsecured loan rates.

The BoE is estimating that around two-fifths of mortgages will go up over the next year, so more people will be having to make higher monthly payments.

For example, a homeowner with a £250,000 tracker mortgage on a 25-year term will be paying an extra £62 a month after today’s announcement.

“Unfortunately, policy tightening will inevitably take its toll on the UK economy," Seema Shah, chief strategist at Principal Global Investors, said. "Higher mortgage payments and borrowing costs will only add to the awful cost of living crisis, straining household budgets in a way we haven’t witnessed for over 60 years and plunging the UK into recession later this year."

Should we expect a further rate rise in September?

Markets have been pencilled in another 25bp hike in September, before a pause after that.

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