UK central bank in biggest rate increase for 33 years

UK Central Bank

The Bank of England, the UK’s central bank, raised interest rates to 3% on Thursday from 2.25%, its biggest rate rise since 1989.

However, the central bank pushed back against expectations for further steep interest rate hikes, saying the UK faces a long recession.

The BoE’s Monetary Policy Committee (MPC) voted 7-2 to lift rates by 75 basis points to 3%, the highest level in 14 years.

However, BoE Governor Andrew Bailey said at a press conference: “We think bank rate will have to go up less than what’s currently priced into financial markets.

“That is important because, for instance, it means that the rates of new fixed-term mortgages should not need to rise as they have done.”

The MPC said: “The MPC’s latest projections described a very challenging outlook for the UK economy. It was expected to be in recession for a prolonged period and CPI inflation would remain elevated at over 10% in the near term.

“From mid-2023, inflation was expected to fall sharply, conditioned on the elevated path of market interest rates, and as previous increases in energy prices dropped out of the annual comparison …

“The continued risks from volatility and geopolitical uncertainty necessitated some tightening.

“But these risks also made it harder to take stock of the current situation and a smaller rate increase was warranted to safeguard against creating a deeper and longer recession …


Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown: “It’s proved to be yet another dismal day for the pound as forecasts of a long recession cast a dark shadow over the UK economy.

“Sterling dropped by 1.9%, to just $1.116, its lowest level for two weeks, before recovering slightly. Investors have been assessing the bleaker outlook for Britain amid forecasts unemployment could shoot up to just shy of 6.5% by 2025.

“The pound has been sideswiped yet again by expectations the Federal Reserve will be ahead of the curve on rate rises, with chair Jerome Powell warning that interest rates are set to linger for longer.

“Although the Governor of the Bank of England, Andrew Bailey, indicated the Old Lady was not yet for turning on rate rises, he said the peak will be lower than market expectations which this morning we currently hovering around 4.6% for June 2023.

“After opening sharply lower, the sell-off accelerated on the domestically focused FTSE 250 as the harsh reality about the impact of a squeeze on discretionary spending became clear …

“There is clearly concern around the table at the Bank about the effect on the economy and the deflationary impacts of recession with two members voting for smaller rate hikes, of 0.25 and 0.5%.

“The economy is forecast to contract by 0.75% in the second half of 2022, as a result of the severe cost-of-living squeeze, with output expected to continue to fall until early in 2024.

“In just two years’ time we could have swung from worries about the risk of an out-of-control price spiral to potential worries about deflation, with inflation expected to briefly dip below the 2% target in 2024.

“The stage is now set for a fresh political debate about fiscal policy, and whether expected spending cuts are simply the wrong medicine for an ailing economy.’’

Joshua Raymond, director at online investment platform “We’ve seen investors move quickly to strongly sell out of the pound in the immediate reaction to the BoE’s 0.75% interest rate hike, the biggest hike for 33yrs.

“The pound fell around 1% against the US Dollar in volatile trade and hit its lowest levels against the euro in a week. That reaction tells you investors are disappointed not necessarily in this hike alone but the guidance from the central bank that rates won’t need to rise much further to contain higher inflation.

“We should remember that the market has long deemed the Bank of England’s response to inflation and far too slow and too weak.

“The new guidance is likely to be seen as a return to that interpretation. And the troubling part is, should the BoE be correct and not need to hike rates much further, its more likely to do with the severity of the recession the Bank itself says the UK is already in.

“That’s also bad news for the pound.”

Richard Carter, head of fixed interest research at Quilter Cheviot: “Markets had widely anticipated the hefty rate hike, particularly given the Bank has had to make the move prior to the government’s fiscal statement after it was delayed until later this month.

“However, this latest move is actually significantly lower than it could have been given the furore caused by the mini-budget just a matter of weeks ago.

“The change of Prime Minister appears to have restored some calm to UK bond markets, and the BoE could take a smaller step as a result.

“The Bank now predicts that inflation will rise to approximately 11% in Q4 2022. Inflation reached a 40-year high of 10.1% in September, meaning we still have a way to go yet.

“As such, further rate rises are no doubt on the cards in the months ahead, but the pace at which they are increased is likely to slow.

“Mortgage rates are already reaching increasingly high levels that are fast becoming unaffordable for many, and the prospect of tax increases at the Chancellor’s upcoming Autumn Statement may also put a dampener on future hikes.”

My Pension Expert CEO Andrew Megson: “The past week has seen market turbulence calm somewhat, following the appointment of Rishi Sunak as Prime Minister. But the BoE’s decision to hike interest rates to 3% is a stark reminder that the UK’s economic health remains fragile.

“For pension planners, this means prolonged uncertainty for their financial future. Almost two fifths (37%) of UK adults aged 50 and over believe that the cost of living has made retirement impossible for the foreseeable future, according to My Pension Expert’s research. And whilst many will look to the Sunak-Hunt political partnership to bring a sense of calm and clarity, it is clear further challenges lie ahead.

“People are desperate for reassurance. As such, it is vital that more is done to ensure Britons have access to independent financial advice.

“The government must prioritise working with the financial services sector to ensure savers know where to go for advice, and how it might improve their situation. Doing so will help savers regain some financial confidence in the face of such economic volatility.”

James Richard Sproule, Chief Economist UK at Handelsbanken: “Our calculations are that the average home owner coming off a fixed rate mortgage (approximately 7% of households p.a.) is going to see a steep rise in debt servicing costs; in many cases mortgage costs will be rising from 17% of disposable income to as much as 25%.

“This alone is going to result in a 2% decline in consumer spending across the economy as a whole.

“This pain will of course be concentrated, but there is broader evidence that consumers across the board are increasing savings in anticipation of future interest rate and taxation rises, as well as an expectation that unemployment is set to rise.

“Overall the Bank now expects GDP to decline by 0.75% in the second half of the year …

“The BoE’s target for inflation is 2%, September’s CPI was 10.1%; but the Bank does expect inflation to peak at 11% in the coming weeks before falling precipitously over the course of the next 18 months, moving below target in mid 2024.

“There is an assumption by the MPC that there will be some form of energy support continuing beyond the present program’s expiry in April 2023, and we concur, to have energy prices rocket to market rates would be crippling not only for consumers, but for the governments own debt servicing costs.

“That said, in general we are more cautious about how quickly inflation will fall. Not only are issues such as the Ukrainian crisis and attendant impact on energy far from settled, there is the prospect of a crisis in Taiwan as well.

“Moreover our view is that if inflation rapidly spikes, it can be rapidly overcome. But when it goes above 8% and remains there for some time, as is now the case, businesses have to adjust to the higher cost base.

“Thus an iterative process which can take a year or more is started, with firms looking to see where they can reduce costs or increase prices, and gauging the market reaction to such moves.

“The bottom line is our base case does see inflation falling away over the course of 2023, subject to there being no further geo-political shocks, but that core inflation remains above target and thus that interest rates remain at 4%, well above their neutral levels of 2.5%, through 2024 …

“As for Quantitative Tightening, this was due to start at the beginning of October, but was delayed by Chancellor Kwarteng’s Fiscal Statement and the ensuing market turbulence. The first phase of active tightening took place on 1 November, the £750 million in Gilts received £2.44 billion in bids.

“For the moment at least the active sales (the next passive QT is not due until next June) are set to continue at £10 billion per quarter over the next year, these active sales are looking to smooth out the overall downward path of holdings in the Asset Purchase Program and are set to concentrate on shorter dated Gilts.

“Our view remains that QT is going to have a significant impact on the economy, both asset prices and more broadly, and our forecast that interest rates will peak at 4% is in part based on QT continuing to do much of the monetary tightening in the coming years.”

UK Finance Minister Jeremy Hunt: “Inflation is the enemy and is weighing heavily on families.

“Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth.

“However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”

Dr Maria Rana, macroeconomic expert, University of Salford Business School: “The BoE has been left blind not knowing how tight (contractionary) the fiscal policy will be.

“The U-turns on the catastrophic mini-budget of Truss and Kwarteng announced by the new Chancellor Jeremy Hunt have been well received by the markets and the interest rate did not have to rise as much as it would have had if there had not been a change in fiscal policy and Prime Minister.

“However the uncertainty on how far the Government will now go with its spending cuts and increase in taxes, has made the decision of the BoE even more difficult.

“Given that the BoE has also forecasted the longest period of recession, with prediction that the GDP will fall for eight consecutive quarters, it seems that such an increase in the cost of borrowing to cool the economy was not needed.

“There is now the risk to make recession even deeper.

“The Governor has justified today’s decision by explaining that inflation might increase even higher than the 40-year high (10.1 %) in September, due to the disruptions in supply chains post pandemic, the war in Ukraine and decrease in the labour force.

“Bailey has also announced that there is a ‘tough road ahead’  but the Bank also does not expect interest rates to raise as much as markets expect.

“Let’s now wait for the autumn statement and spending review later this month to see how tough the road ahead will be.”

Ben Laidler, Global Markets Strategist at social investment network eToro: “This was a step-change from the Bank’s slow-and-steady pace of eight consecutive rate hikes and will add to pressures on UK borrowers, hasten the economic slowdown, while dividing the BoE monetary policy committee.

“But it also raises the hope of a quicker decline in the inflation tax being paid by all, resulting in ultimately lower interest rates, while staving off a return of the currency and bond market vigilantes who wreaked such havoc recently.”