The Bank of England Expected to Raise Interest Rates
The Bank of England is anticipated to increase its interest rate for the 14th consecutive time today. Economists predict a 0.25 percentage point rise, bringing the rate to 5.25%. However, there are concerns about the potential impact of rising rates on households.
The Bank’s Monetary Policy Committee (MPC) surprised experts in June when they raised the rate by a larger-than-expected 0.5 percentage points. Some analysts believe a similar scenario could occur this time. Governor Andrew Bailey has stated that these increases will help bring down high inflation in the UK to the Bank’s target of 2%. However, critics remain skeptical about the effectiveness of this strategy.
One consequence of rising interest rates is increased borrowing costs, including larger monthly mortgage payments for homeowners. This, in turn, can lead to higher rents for tenants. On the other hand, savers should theoretically benefit from better rates. Nevertheless, concerns have been raised that many banks are not passing on these benefits to their customers.
The Bank of England’s unexpected rate hike in June was prompted by inflation remaining at 8.7% in the year leading up to May, contrary to predictions. However, inflation dropped more than expected to 7.9% the following month. The last time the bank base rate stood at 5.25% was in March 2008, 15 years ago.
The MPC’s announcement will be closely monitored for its impact on the housing market and the wider economy. There are fears that rising rates could push the UK into a recession. The Nationwide Building Society reported a 3.8% decline in property values in July, the largest drop in 14 years. The society attributed this decline to reduced demand caused by stretched affordability for mortgages.
According to Moneyfacts, the average two-year fixed residential mortgage rate was 6.85% on Monday and Tuesday. Over the same period, the average five-year fixed residential mortgage rate was 6.37%. Economists surveyed believe there is a 64% probability of a 0.25 percentage point increase in the interest rate and a 36% chance of a 0.50 percentage point rise.
Joseph Calnan, from payments provider Moneycorp, expressed uncertainty about the MPC’s decision, stating, “For the first time in a long time, we’re unsure what to expect at this next meeting. We could see a 50 bps [basis points] hike, a 25 bps hike, or even no change at all given [inflation] finally eased off in June after a stubborn 11 months.”