The Bank of England has raised its benchmark interest rate by 50 bps, increasing from 4.5% to 5%.
Today, the Monetary Policy Committee (MPC) voted by 7 to 2 to increase by 50 bps. Two of the members wanted to remain at the current 4.5% rate.
Similar to the US Federal Reserve, the Bank aims to hold inflation at a rate of 2%, but at the last Fed meeting, members decided to pause rate increases as they observe the impact of the aggressive rate increases in the past months.
The Bank reported that the twelve-month CPI inflation fell from 10.1% in March to 8.7% in April – holding steady in May. Some observers had expected the rate of inflation to decline in May.
At the same time, the services CPI inflation rose to 7.4% in May, 0.5 percentage points higher than expected. The Bank added that core goods price inflation has also been much stronger than projected.
Growth remains subdued, with GDP around .24%
The Bank still predicts the consumer price index inflation will “fall significantly” later this year
The MPC said it will continue to monitor inflation and labor conditions and further tightening may ber necessary.
In an email, Andrew Boyajian, Head of Variable Recurring Payments at Tink, said the increase in rates and the ongoing cost of living crisis will leave many people “floundering” when it comes to personal finances.
“This reality is demonstrated in our latest research, which finds that almost a quarter (23%) of Brits are ‘financially vulnerable’, with the majority (56%) expecting their situation to get worse over the next 12 months,” said Boyajian. “Finding ways to financially support the UK’s consumers is crucial. Leaning on Fintech developments such as open banking-powered Variable Recurring Payments (VRPs), may well form part of the answer and play a role in helping people navigate this financially challenging period.”
Giles Coghlan, Chief Market Analyst consulting for HYCM, said the stakes have never been higher for policymakers as inflation is the highest it has been since John Major was PM. Coghlan said with headline inflation at 8.7%, 50 bps increase was necessary.
“The BoE is unlikely to clearly signpost how high rates will go at this stage, because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. Despite the stagflation and pain it will cause in the near-term, market expectations now see rates exceeding 6% in early 2024, and the threat of a recession looms more than ever. We have already seen some GBP sell-off, but this will continue if a recession looks increasingly likely,” said Coghlan.
Andy Mielczarek, Founder and CEO of SmartSave, looked on the bright side noting that better savings rates are the silver lining but customers loyal to high street banks may be paying a high price for their loyalty by missing out on better rates.
“With the average easy-access rate sitting at 2.3%, there is often a big gulf between average rates and the top deals that can be secured by looking beyond the high street and also considering fixed-term products. Today’s latest hike, already priced into some savings products, only makes it more important that people consider all their options.”
Shojin CEO Jatin Ondhia, called the rate increase another blow today in the battle against inflation, which continues to overpower the Bank of England’s fiscal policy.
“With forecasts signaling that further hikes could be on their way, the Bank’s ‘do what it takes’ approach – which has the backing of the Chancellor – will ring alarm bells for many,” said Ondhia. “Higher borrowing costs will continue to squeeze homeowners and property investors, which in turn will lead to more buy-to-let investors exiting the market and increase rental costs due to a dwindling supply of property. The impact of this will be felt far and wide. Renters in high-demand areas like London are already spending 40%-50% of their salary on rent. We can only hope that inflation starts to settle soon, but I expect more pain before relief comes.”
Ondhia noted that property values are high due to the shortage of supply and the past decade of low-interest rates and cheap borrowing is over.
“For existing borrowers, the Chancellor has ruled out direct government assistance but is meeting with banks on Friday to find ways to soften the blow. Let’s hope they come up with something sensible otherwise we could see an increase in defaults which have so far been muted.”
Mohsin Rashid, CEO of ZIPZERO, predicts that soaring interest rates could now deliver the knock-out blow to millions of Britons, with mortgage holders facing unaffordable repayments.
“Make no mistake: if interest rate hikes continue on this trajectory, defaults are set to soar,” said Rashid.
“Throughout the cost-of-living crisis, households have found creative money-saving solutions everywhere, from food shopping, and energy usage, to monetising their own data. But households cannot fight this war on every front. The government must now conjure the same ingenuity and find creative solutions to support struggling households who are reading today’s news in the fear that their finances are going to be stretched beyond breaking point.”