UK central bank ups rates to 5.25%, a 15-year high

UK Central Bank

The UK’s central bank on Thursday raised its key interest rate by a quarter of a percentage point to a 15-year high of 5.25% — and gave a new warning that rates are likely to stay high for some time.

“The MPC (Monetary Policy Committee) will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target,” said the Bank of England in new guidance.

“Some of the risks of more persistent inflationary pressures may have begun to crystallise,” added the central bank.

UK inflation hit a 41-year high of 11.1% last year but fell to 7.9% in June — still the highest of any major economy.

MPC policymakers voted 6-3 for the increase, but were split three ways on the decision. Two MPC members — Catherine Mann and Jonathan Haskel — voted for a half-point increase this month, while Swati Dhingra voted for no change.


Kevin Brown, savings specialist at Scottish Friendly: “After today’s 0.25% hike, we are hopefully nearing the end of this record-breaking run of consecutive rate rises. If inflation continues to slow, then the Monetary Policy Committee (MPC) will be hard-pressed to keep pushing rates higher.

“However, while we may be approaching the peak, the struggle is far from over for households. The Prime Minister has suggested today that there is light at the end of the tunnel, but the MPC doesn’t expect inflation to return to its 2% target until Q2 2025.

“Higher prices are bedded into the economy and are still rising quickly in some areas, such as food and drink. Families’ mortgage payments are going up, often by hundreds of pounds a month, and rents are also rising sharply.

“This net result is that people are withdrawing money from their savings and borrowing more at a time when the cost to do so is sky-high.

“The best households can do is to take action to protect themselves from higher price and higher rates where they can. Shopping around to find the best deals on your mortgage, savings and investments, and credit is now more important than ever.”

Victoria Scholar, Head of Investment, Interactive Investor: “The Bank of England has raised interest rates again for the fourteenth consecutive time by 25 basis points to 5.25% as expected. Looking ahead, traders are expecting a 68% chance of another 25-basis point increase at its September meeting with a 32% chance of no change.

“Some economists were anticipating a more aggressive 50 basis point move to 5.5% but clearly the central bank has opted for a more incremental, data dependent approach, particularly given that interest rates work with a shorter lag later in the rate hiking cycle, where we are now … 

The Monetary Policy Committee decision was by no means unanimous with a vote split of 6-3 in favour of this increase. Two members voted for a more aggressive 50 basis point move while one dove wanted to keep rates on hold.

“Monetary policy is a notoriously blunt tool and is therefore less successful at tinkering around the edges. The magnitude of today’s hike is more about sending a signal about how concerned the central bank is about inflation.

“Clearly there’s a long way to go to bring inflation back down to the 2% target, but recent data points to encouraging signs that we’re finally moving in the right direction with global supply chain bottlenecks fading, wholesale energy prices on the decline, and increased slack in the labour market. Uncertainty remains around the outlook for food inflation and strong wage growth, both of which could slow the path for disinflation …

The Bank of England has lowered its forecast for inflation in one year’s time to 2.82%, versus its prior forecast from May of 3.38%. It has also raised its full-year growth forecast to +0.5% in 2023 up from +0.25% in May but has lowered its 2024 outlook for GDP from 0.75% in May to 0.5%. The central bank estimates unemployment will hit 4% in the fourth quarter up from its prior estimate of 3.75%.

“This is an upbeat assessment for the path for growth and inflation from the Bank of England. For GDP this marks a massive turnaround from its predictions last November when the central bank believed we were heading for the longest recession in a century. It clearly judges that the macroeconomic indicators are heading in the right direction but governor Andrew Bailey said we need to be ‘absolutely sure’ inflation falls ‘all the way back to 2%’ which is why another hike in September is possibly on the cards.”

Steve Clayton, head of equity funds, Hargreaves Lansdown: “This was a tough call for the Bank’s policy committee.

“In the end, six members voted for the quarter-point hike, two for a half-point, with only one voting not to raise at all.

“Inflation data has been improving, but the economy remains stronger than many expected. In the end, the Bank opted to play it safe. A quarter-point rise keeps the pressure on – but does not add too much to the heat.

“In their commentary, the MPC highlighted that market expectations for future levels of rates had risen sharply, to average almost 5.5% over the next three years, with a peak level of just over 6%.

“The committee pointed out the increasing conflicts in the data. They stressed that pay growth in particular, at 7.7%, is far ahead of their earlier expectations and risks embedding elevated inflationary expectations into the economy.

“Inflation is seen falling to around 5% by year-end and does not reach the 2% target level until 2025 Q2, with risks on inflation skewed to the upside. The Bank sees its monetary stance as restrictive at these levels but, even so, the MPC stress they are prepared to go further should evidence of more persistent inflationary pressures emerge.

“So far, the markets have been relatively approving of today’s move and the MPC’s statement. Gilt yields have fallen a shade, including the 2 and 5 year levels that are important for where fixed rate mortgages may be headed. Sterling took a lurch down, even though it was already at its month’s low against the dollar before recovering a fraction to $1.265. The stock market has, so far, taken the hike positively with the FTSE trimming earlier losses, to stand at 7515 shortly after the announceme”

Nicholas Hyett, investment manager at Wealth Club“Central bankers will be fed up with questions about whether they’ve reached their destination. But that doesn’t mean they’ve gone away. Is this the peak for rates, or has one of the most painful interest rate accelerations in living memory got further to go?

“The MPC is sitting on the fence in these minutes. Recent strength in wage growth has clearly got Bailey & co. worried. But there’s also a recognition that the past rate rises are starting to weigh on economic activity, which has led to a slight slowdown in rate rises.

“But the penultimate line of the summary says it all. ‘If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.’

“The Bank is determined to keep its eyes on the monetary road regardless of the noises coming from the backseat.”

Lily Megson, Policy Director at My Pension Expert: “Another interest rate hike means more pain for borrowers, but it ought to come as good news for savers. Yet ‘ought’ is the imperative word here. Sadly, despite the Bank of England pushing the base rate higher and higher in its fight against inflation, many high street banks are continuing to fail to pass on these advantages to their customers. This is deeply disappointing, adding to the financial strain on savers in the midst of a cost-of-living crisis that is far from over.

“The Financial Conduct Authority is right to scrutinise the banks for not passing on better rates, and action cannot come fast enough. Britons need all the support they can get in the current economic climate, which is making financial planning very challenging. However, banks’ interest rates are just one area where change is needed. It is important that customers feel supported and empowered to make more informed decisions. Making information regarding savings or investment options available would be a step in the right direction. So too would be improving access to affordable advice.

“Now more than ever, it is crucial for banks and the wider financial services industry to prioritise consumers’ interests and uphold regulatory, ethical and moral commitments to putting consumers first. By doing so, they can regain trust and contribute to a more stable financial landscape for everyone.”

Charles White Thomson, CEO at Saxo UK, said: “Today’s hike of 25bps by the Bank of England takes the cumulative rate hikes to 515 basis points from the turbo charged days of base rates at 10 basis points. The ‘no ifs, no buts’ war on enemy number one, inflation, is a battle royal and continues to apply significant pressure to the struggling UK economy and consumer.

“We should not underestimate the speed and ferocity of such rate moves and the pressure this is applying to the leveraged consumer. The full extent of this has yet to be seen, as with inflation there is lag, including mortgage holders who are rolling off unprecedented super cheap deals. Monetary policy setters, especially in the UK , have a highly difficult conundrum to solve – defeat inflation with the blunt weapon that are interest rates without breaking the economy and consumer.

“The risk for further policy failure is real and the stakes are getting increasingly high. The question of how we got here is a critical one. I want institutions like the Monetary Policy Committee to break the cycle of group think.  It is not just the Bank of England; it is many of the world’s Central Banks and other institutions who suffer from this.

“It has been a disappointing period for many of these institutions with key logic based on super cheap money in the form of quantitative easing and rock bottom interest rates and the resulting asset bubbles and inflation driving the existing counter measures.

“The view on transitory inflation is a classic example – the collective Central Banks filled to the brim with highly qualified Economists, many of whom are all trained in the same institutions in the same financial theory and who, in the majority, believed that inflation would return quickly to 2% because that is what the theory predicted.

“This is why I would like a full review of our Monetary Policy, and the performance of the Governor and the MPC to be carried out by ‘generalists’ as well as Economists. Going forward, the MPC and similar organisations should have a mix of Economists as well as informed generalists who should rejoice in their ability to think differently because it generates new thinking. Swimming against the tide is not easy and that is why in the majority of cases, it is more common to have the consensus supporters than not.

“The recent announcement that the distinguished and former Chair of the Federal Reserve, Ben Bernanke, has agreed to lead a review into the Bank’s forecasting and related processes supported by the Bank’s Independent Evaluation Office leaves me with mixed emotions.

“The review is welcomed but the area of concern is that this is being carried out by the Economists’ Establishment. Though I acknowledge that Economists need to be heavily involved in any review, my ask is to see fresh eyes and the involvement of more experienced and informed generalists so that we bring a less purist view to this important process.”

Paresh Raja, CEO of Market Financial Solutions: “That the base rate now resides above 5% is not in itself a significant issue; this was, of course, the norm before 2008. But the fact the jump up from a meagre 0.1% has come in a relatively short space of time (since December 2021) has offered borrowers, investors and businesses little time to adapt to higher rates.

“Positively, looking ahead, economists are suggesting the base rate may not rise as high or as quickly as once thought, and the rates available on products are starting to reflect that. Today’s hike shows that – perhaps counter-intuitively for borrowers, even though the base rate rose, there is some good news in that the jump was smaller than previously predicted, allowing lenders to reassess their rates accordingly.

“But right now, flexibility and communication from lenders remains of utmost importance, helping both existing and prospective clients to borrow responsibly without pulling products out from under them or being too rigid in the terms of loans. The market will realign to a higher base rate in due course, but today’s latest hike from the Bank of England reaffirms that lenders must double down on a proactive approach to supporting property owners and property buyers who will feel the effects of it.”

Jatin Ondhia, CEO of Shojin, said: “It is more of the same for now, but there is a sense that we might be nearing the top of the interest rates mountain. Inflation is finally falling, with the next set of data on 16 August expected to show another notable decline. In turn, pressure will ease on the BoE, meaning it can slow or pause on its hiking of the base rate. All of this would allow for much-needed stability and hopefully a bit of confidence to return.

“Still, we cannot underestimate the implications of elevated borrowing costs across the property market. Homeowners are facing higher mortgage rates than at any point since the financial crisis, while developers are also finding it harder to access finance. Consumers, investors and businesses will all be hoping that we are nearing the end of this economic turbulence – higher interest rates are here to stay, but we undoubtedly need to arrive at a point where the base rate is not continuously rising, giving everyone the chance to take more confident action where their money is concerned.”

Marcus Brookes, chief investment officer at Quilter Investors: “Having taken more drastic action at its last decision, the Bank of England has today settled for a quarter of a percentage point rise in interest rates to 5.25% – the highest level since April 2008 when the world was gripped in the financial crisis. Even with inflation coming down faster than forecast recently, this may not be the end of the BoE’s action. Yes, the interest rate rises we have seen to date are beginning to have an effect, but it is not certain that it is enough yet to get inflation back to the 2% target the BoE operates to. As such, we may need to expect another rise later this year.

“That said, interest rates probably don’t have to go as high as the market is predicting, currently somewhere above 6%. The UK economy and consumer has been incredibly resilient but are clearly now beginning to be hit. Inflation is falling and should continue to do so for the rest of the year, even if not to that magic 2% number. The next few sets of inflation data will be crucial to see just what impact the BoE has managed to have and what is still likely to come.

“The BoE is walking a tightrope at this stage, where the interest rate rises we have seen could tip the UK economy into recession. The BoE will want to avoid that but may have no choice in order to tame inflation. The US is looking increasingly likely that it could achieve a soft landing by keeping economic growth ticking along as inflation comes down. The UK has no such luxury, and as such should a recession become more likely then we will see how long the line that rates will stay this high for an extended period of time can hold.”

Julian Jessop, Economics Fellow at the free market Institute of Economic Affairs: “The Bank’s decision to raise rates again, albeit by just a quarter point, suggests that the MPC is still looking in the rear view mirror.

“Money and credit growth have already slowed sharply and other leading indicators of inflation have weakened, including commodity prices and evidence from business surveys.

“It would have made more sense to pause to assess the impact of the large increases in rates that have already taken place, as other central banks have done.

“The UK economy is like a frog slowly being cooked by ever higher interest rates. By raising the temperature further now, the Bank risks doing too much and, once again, only realising its mistake when it is too late.”

Neil Shah, Executive Director at Edison Group: “The BoE raising interest rates by 25 basis points to 5.25% comes as no surprise, marking Britain’s 14th consecutive increase since December 2021. With the highest inflation rate since the 2007/2008 financial crisis, this new rate adds pressure to household incomes through increased mortgage bills, leaving little room for economic growth as recession looms.

“Similar to past interest rate hikes, the BoE faces a tough choice — pause its cycle of interest rate hikes to control inflation or continue raising them despite signs of an impending recession. With the service industry, which accounts for 80% of the economy, remaining under pressure due to a rise in wages despite a decrease in costs, one can predict the UK economy will flatline, at best, in the months ahead.”