Bank of England raises interest rates

This increase - the fifth time rates have risen in a row - will take rates to 1.25%, the highest they’ve been for 13 years. The MPC voted by a majority of 6-3 to raise rates by 0.25 %, with those in the minority preferring to increase rates by 0.5%.

As part of the MPC’s central projections, it expects GDP growth to slow down over the first half of the forecast period. Meanwhile, the labour market is expected to tighten slightly further in the near term with unemployment projected to rise to 5½% in three years’ time

Bank staff also expect 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. Consumer confidence has fallen further, but other indicators of household spending appear to have held up.

Looking at consumer price index (CPI) inflation this - according to the MPC - is expected to average at slightly above 11% at its peak in the final quarter of 2022. CPI inflation is projected to fall to a little above the two percent target in two years’ time, largely reflecting the waning influence of external factors. 

Inflation’s overshoot of the two percent target mainly reflects previous large increases in global energy - greatly exacerbated by the war in Ukraine - and other tradable goods prices, reflecting the impact of the pandemic.

Domestic factors have also played its part, including the tight labour market and the pricing strategies of firms. However, consumer services price inflation, which is more influenced by domestic costs than goods price inflation, has strengthened in recent months. 

In addition, core consumer goods price inflation is higher in the UK than in the euro area and in the US.

Commenting on the news,  StepChange Debt Charity’s director of external affairs Richard Lane said: “Taken together, today’s rate rise and the FCA’s reminder to firms to treat their customers fairly suggest that the cost of living crisis still looks set to get worse before it gets better, even with the support measures that the Government has so far announced.” 

Equifax UK’s chief data and analytics officer Paul Heywood added: “Some will argue that the Bank of England is not doing enough to cool this inflationary heat wave, but the fifth consecutive interest rate rise since December shows that it is serious about tackling rising prices while remaining rightly cautious of a looming recession. 

“The question now on the lips of borrowers and savers up and down the country is: how far will they go, and how long will it last? Last month, many homeowners decided to take fate into their own hands by fixing their repayments for five or even ten years. 

“However, 1.9 million people on a variable or tracker mortgage or the millions of other homeowners waiting to fix their mortgages for an extended period, will be watching nervously as interest rates creep up month by month. 

“This could all be viewed as good news for people with large pots of savings, but few will feel like they’re winning at the moment as inflation eats away at nest eggs faster than they can grow. Our data is already pointing to a squeeze on disposable income, with early signs that more consumers are, or will soon, fall into arrears on loan repayments. 

“Looking further ahead, any further base rate increases, coupled with the continued macro-economic situation may result in an increase in mortgage arrears nearing the start of 2023. 

“We are working with, and calling on, all lenders to pay close attention to their customers’ repayment behaviours, using open banking where possible, and acting early to help those that show signs of being in difficulty.”