UK central bank ups rates to highest since 2009

The UK’s central bank raised interest rates for a fifth straight meeting on Thursday and sent a strong message it is prepared to make larger moves if required to tackle inflation.

The Bank of England’s Monetary Policy Committee voted 6-3 to increase the benchmark lending rate by 25 basis points to 1.25% — while a minority of officials maintained their push for a move of double that size.

The UK central bank stuck to its gradual increases in interest rates as other central banks took more urgent action, but said it was ready to act “forcefully” if required to curb inflation that it now sees topping 11%.

“The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit,” said the central bank.

“The scale, pace and timing of any further increases in Bank Rate will reflect the committee’s assessment of the economic outlook and inflationary pressures.

“The committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.”

REACTION:

Luke Bartholomew, senior economist, Abrdn: “No surprises from the Bank of England today, after a week where several other major central banks have given markets something of a jolt.

“The 25bps increase might look relatively small compared to the 75bps increase delivered by the Federal Reserve in the US yesterday.

“But while both central banks are dealing a large inflation overshoot, the problems facing the UK economy are different and in some ways more difficult than those in the US.

“The UK is still some months away from the peak in inflation, which would argue for tighter policy, but there is also evidence that economic activity is slowing sharply and the labour market is cooling, which might argue for a more cautious approach.

“The difficulty of navigating this dilemma can be seen in the split vote at the Bank.

“We expect the more cautious voices to continue to win out in Bank policy making, and the different approach between the US and UK will remain a key driver of markets, especially currency markets.”

Kevin Brown, savings specialist at Scottish Friendly: “By raising interest rates in quick succession the Monetary Policy Committee is desperately trying to curb inflation.

“It may be that the speed at which prices have risen this year has been underestimated. Although the central bank finds itself in a difficult position with factors at play that are outside of its control, we cannot forget that consumers are stuck between a rock and a hard place.

“Living costs continue to rise and could spike sharply again in October when the new energy price cap comes into effect, and with interest rates going up many UK households are also facing higher borrowing costs. 

“Savers should benefit from rising interest rates, but in a cost-of-living crisis many households will be more concerned with their bills going up, rather than the possibility of earning a few extra pounds on their savings.”

Alastair George, chief investment strategist at Edison Group: “Today’s decision to raise rates by only 0.25% even as inflation in the UK is so far above target and now expected to peak at double digit levels shows the bind the Bank of England is in.

“Current inflation is way above target yet forward looking data suggests the economy is likely to slow.

“Policymakers have decided to err on the side of caution in respect of growth which is in our view the right call – but sterling is likely to remain under pressure as a result, given the relatively more rapid pace of monetary tightening in the US.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown: “Inflation risks being a slow poison for the economy, so the Bank of England is trying to take an antidote now by raising interest rates.

“However, it can only take a small dose at a time given the ailing nature of the economy.

“So, it’s stuck with a 0.25% rate increase to 1.25%, with more hikes to follow. It’s not following the prescription written by the US Federal Reserve of the more potent medicine of a steeper hike due to fears a deep recession could follow.

“The US central bank hiked rates by 0.75% yesterday, more than it had initially planned given the worries of spiralling prices.

“Worries will ratchet up that given inflation is set to soar to the eye watering levels of 11%, the Bank of England is going to be seriously behind the curve in attempts to bring it down.

“There is dissent around the table, with policymakers charged with administering this bitter pill for the economy split on the course of action to take. 3 members wanted to see a steeper 0.5% rise, and that concentrated dose may well be given in the months to come if these red hot prices show no sign of easing …

“If demand is already slowing this could mean that the Bank of England may keep on its more cautious path for monetary policy in the future.

“But it will need to see inflation coming down significantly from its red-hot levels, before it can step off the pedal of rate rises.’’

Zeeshan Syed, economic expert from the University of Salford Business School: “There is a consensus that the bank rate must raise; however, the trouble was over how much it should increase.

“BoE rate is still among the lowest in its history; other than during the post-financial crisis period, the current rate only existed during the second world war.

“Raising the rate is the only way forward, as the ex-governor, Mervyn King, notes that BoE’s inaction has already paved the way for fiscal mismanagement.

“The actual question for this MPC had to decide was how far to go with the rate rise. The MPC has only gone for another increase of 0.25%, this may not be enough.

“The breakdown of inflation suggests that people are consuming, spending, and borrowing as if there is no tomorrow. That is causing an upward inflation spiral.

“Recent data suggest that out of 9.5% of inflation, 5.5% is contributed by goods and services consumption. The threat is that the trend may balloon as EY predicts that consumer borrowing will increase to 7.9% this year, a five-year high.

“In this context, BoE is duty-bound to curtail this buy now pay later culture and inhibit the widespread and un-accounted for consumption.

“The more the bank increases the rate beyond expectations (above 0.50%), the more quickly this irrational exuberance will end, and fiscal sanity will prevail.”

Hinesh Patel, portfolio manager at Quilter Investors: “Members of the MPC will be reeling from the political and populous backlash coming from record-setting levels of inflation. Andrew Bailey has been on record saying ‘it wasn’t me’ but he is the governor – and must acknowledge they have sponsored government profligacy.

“As was widely expected, today the Bank chose to maintain its course at 25bps, marking the fifth consecutive rate rise since the BoE first began its campaign against inflation, but signalled a larger move may be on the horizon. We expect this will be needed to try and stabilise UK sterling at the very least given the larger hikes in the US.

“While the Bank has further increased rates, it has done so with considerably less gusto than the Fed which last night announced a 75bps hike – making the Bank’s 25bps increase look rather lacklustre in comparison.

“Inflation climbed steeply in April to yet another 30-year high of 9%, and the BoE has once again had to raise its predictions for the longer term as a result. It now expects inflation to be over 9% over the next few months and to rise above 11% in October as a result of the higher projected household energy prices. As such, the Bank had no option but to hike rates in an effort to contain it.

“However, with the outlook of the economy looking increasingly unsteady, particularly following the latest GDP data which showed negative growth of 0.3% for the month of April, the Bank will have been unwilling to hike rates too quickly and thus opted for the safer 0.25% increase as opposed to the 0.5% some originally expected. Given the global risks such as the ongoing Russia-Ukraine war alongside decreasing consumer confidence, growth is expected to continue slowing.

“All together it seems the Bank will be tightening in to a very weak economic backdrop in the quarters ahead, however there is no choice but to go hard-and-fast before inflation expectations become structurally unanchored.

“Given the delicate market environment we could see inflation continue to rise above the Bank’s forecasts – particularly as the goalposts have so often been moved already. Investors will need to continue to watch the data and markets closely and allocate accordingly. Diversification, active management and prudency remain key.”

Myron Jobson, senior personal finance analyst, Interactive Investor: “The fifth consecutive month of rate rises in a row means that the base rate now stands at its highest level since just after financial crash at 1.25%.

“What started off as a slow and steady journey to steer inflation towards a more manageable course is starting to look a bit more stomach churning for borrowers. The FCA is hyper alert to this, writing to more than 3,500 lenders today to remind them of the standards they should meet as consumers grapple with the rising cost of living, underscoring the seriousness of this.

“The hope is that a gradual uptick in interest rates will crush inflation without squeezing the UK economy. For consumers, the rate hike and the spectre of further increases could offer some form of reprieve from surging prices – but it also comes at a cost.

“Rising rates means that the cost of borrowing will go up, which spells bad news for the almost 2 million homeowners on variable rate and tracker mortgages and those who are approaching the end of a fixed rate home loan. We have seen rates go up by 1% since December last year, and if someone is reaching the end of their mortgage deal, they could see their new monthly payments go up by more than £1,380 per year based on an average UK mortgage of £138,000.

“Common borrowing arrangements such as a personal loan or car financing won’t usually be affected by changes to interest rates because a fixed rate of interest is typically agreed before the loan is taken out. However, the rate of interest applied to credit cards and overdrafts could go up – even though they are not directly linked to the BoE base rate.

“On the flipside, higher rates mean savings will earn more – although some banks and building societies have been fiendishly slow in passing on recent hikes to the base rate. However, with the rate of inflation now higher than the best savings deal in market, any money in savings loses purchasing power over time – but it still pays to pick the most competitive account.

“Many households will want to try taking steps to shore up their finances: pay down debt starting with the costliest ones and variable rate loans; and build and maintain an ample cash buffer for emergency spending – three month’s salary worth is a good rule of thumb, if not more. Both will allow households to better weather higher interest rates and the cost-of-living crunch which is set to become more acute.

“It is interesting to note that the BoE’s recent survey on the public’s attitudes to inflation found that almost a third of respondents said it would be better for them if interest rates were to ‘go up’, but a quarter of the sample said the opposite, indicating that cost of living experiences are polarised between the ‘haves’ and ‘have nots’.

“It is clear that something needs to be done to tackle runaway inflation as people are struggling to keep up with the escalating cost of seemingly everything from the food we put on our tables to filling up our cars at forecourts.

“However, raising the base rate has become an increasingly blunt tool to rein in rising prices as the main factors fuelling inflation are beyond the Bank of England’s sphere of influence, ranging from the fallout of the devastating war in Ukraine, China’s zero Covid policy and the stubborn persistence of the post pandemic supply bottlenecks.”

Andrew Megson, executive chairman of My Pension Expert: “Under ‘normal’ circumstances, raised interest rates would be welcomed by pension planners. But these conditions are far from normal.

“Unprecedented economic uncertainty, fuelled by soaring inflation, is threatening the retirement prospects of 50% of Britons aged 40 and over, according to research from My Pension Expert. This boost in interest rates, therefore, is unlikely to offer any meaningful comfort.

“Remaining calm in the face of volatility is absolutely crucial – panic could result in people making snap decisions and cause permanent damage to their future finances. Reviewing one’s retirement strategy as early as possible would certainly be advisable.

“So too, would exploring all avenues with the help of an independent financial adviser. Indeed, options such as flexible-access drawdowns and riskier investments offering better returns could help Britons to best protect their hard-saved cash and hold its value against inflation – the key will be to utilise the expertise of an adviser to ensure Britons are choosing the option which best suits their needs.

“Unfortunately, things are expected to worsen before they get better. But action can be taken to limit the potential damage inflicted on Britons’ future finances. Provided they seek advice and consider all viable options, I remain confident that people will remain largely on track to the financially secure retirement they crave.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.