Policy makers at the Bank of England have poured another dash of cold water over the economy in a bid to stop it breaking out in even more of a sweat.

This cooling attempt had largely been priced in by the financial markets given that inflation was running so hot, but some policy makers clearly felt a much bigger splash was needed to get try and get prices under control.

Four members of the Monetary Policy Committee wanted rates to rise to 0.75%, a sign that inflation is fast turning from a niggling headache to a debilitating migraine.

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Prices are forecast to shoot up much higher than the bank’s previous forecasts, peaking at 7¼% in April and this has unnerved investors with the FTSE 100 and the FTSE 250 reversing earlier gains and heading into negative territory as they assess the implications of higher input costs for companies and potentially an evaporation of consumer confidence with the cost-of-living squeeze tightening.

Nervousness remains about the effect of easing off the support bandage of quantitative easing which has also helped keep borrowing costs low.

Although it won’t be ripped off overnight, the roll back of bond buying purchases will begin.

It’s a small shift but a symbolic one, indicating the era of easy money is drawing to an end and will add to concerns about the direction of travel for high growth companies hooked on cheap debt.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:

As the Bank of England raises rates to 0.5%, mortgage borrowers risk getting burned by the intense heat of rate rises in the mortgage market. Savers, meanwhile, may struggle to notice the lukewarm efforts of savings providers.

The energy price cap is set to surge even higher than expected – up 54% to £1,971. And despite the government’s £200 up-front discount, bills that are hundreds of pounds higher will keep the pressure on for more rate rises as we go through spring.

The Bank will need to balance that against prospects for the jobs market and growth – but with unemployment expected to drop in the near future to 3.8, and growth set to bounce back to pre-pandemic levels by the end of March – both are looking rosy enough to withstand a rate rise.

It’s difficult to know how effective raising rates will be in controlling inflation, especially given that so much of the inflation rate is being driven by global oil and gas prices – feeding through into energy bills, petrol prices, and the cost of anything that needs to be manufactured, transported or sold.

However, with inflation set to hit 7.25% in April, the Bank of England couldn’t just sit on its hands and hope for the best.

It will have the bank’s desired effect of making it more expensive to borrow and spend, which is going to come as a horrible blow for borrowers who are wrestling with price rises and tax increases, and now have to add bigger interest charges into an already toxic mixture.

What it means for mortgages

For the 2 million people on variable rate mortgages, the pain is likely to be immediate.

The December hike saw the average tracker rise from 3.38% to 3.53% by January, while the average standard variable rate rose by one basis point, to 4.41%.

For three quarters of mortgage holders, higher rates will only become a problem when their fixed rate deal comes to an end. Unfortunately, new fixed rate deals rose for the third consecutive month to January – and given that the market is expecting more rises in the months to come, we can expect these to keep shifting northwards.

It means it’s worth locking in a new fixed rate as soon as possible – which can be up to six months before your fix comes to an end.

What it means for savers?

Savers have endured so many years of miserable rates, they would have been forgiven for hoping that now rates are on the rise they could finally look forward to better news.

Unfortunately, last month, the high street giants failed to deliver.

They chose to leave their big easy access accounts at 0.01% and enjoy the extra profit instead, which is why the average rate stayed put.

There was a bit more movement among fixed rates – although not a great deal, and many banks held off until February before inching rates up.

According to Moneyfacts, the average one-year bond is up 1 basis point and the average two-year bond is up 5 basis points. It’s only a fraction of the overall rate rise, but it’s better than a poke in the eye with a sharp stick.

There’s always the hope that now profit margins have been increased, further rate rises could persuade banks to boost rates more.

However, with so much cheap money sloshing around at these institutions, there’s not a vast amount of pressure for this just yet.

It means there’s every chance you will need to shop around to get a better rate.

Even then, with inflation at 5.4%, and the best savings rates offering less than half of this, your savings will be losing value after inflation.

For anyone who already has emergency savings of 3-6 months’ worth of essential expenses in an easy access savings account, and won’t need to access the rest of their money for 5-10 years or more, it means investment is worth considering.

The value will rise and fall over the short term, but as long as you have a long time-horizon and a diverse portfolio, you stand a better chance of beating inflation.

Commenting on the Bank of England’s decision to raise interest rates to 0.5%, Douglas Grant, Group CEO at Manx Financial Group PLC, said:

“The Bank of England’s decision to raise interest rates from 0.25% to 0.5% amid the backdrop of an increasingly inflationary environment, was somewhat inevitable.

We believe that demand for working capital is set to soar to unprecedented levels as more businesses desperately require liquidity provisions to counteract supply chain issues, increasing wage inflation and additional pandemic-induced headwinds.

With the cost of borrowing set to increase, many SMEs are going to continue to struggle in 2022.

The rate hike will disproportionately affect small businesses reliant on funding in their early stages of growth, exacerbating the UK SME debt burden and zombie status of weak businesses that continue to service their debt piles with many falling off a loan default cliff.

Its high time we address the question – how is this debt ever going to be paid back and is it in the interest of the UK economy to continue to support all SMEs? We believe that it is imperative that this cycle is not compounded further and that instead we focus on supporting sectors and businesses that are resilient and nimble enough to adapt and therefore continue contributing to the economy’s growth.

Resilient SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed rate loans to prevent additional exposure to an increasingly volatile lending market.

In 2022, businesses will no longer be able to rely on government support schemes to keep their businesses afloat and while this will be very painful for many, it will also create an even more resilient and healthy workforce for the future.”

Adrian Anderson, Director of property finance specialists, Anderson Harris, commented:

“The Bank of England voting to raise interest rates from 0.25% to 0.5% today comes as no surprise after inflation continues to run even hotter than expected.

Inflation soared to a 30 year high in December 2021 as rising energy costs and supply chain issues continued to drive up consumer prices.

The Covid outlook has improved however over the last month which has given the Bank of England confidence to raise rates once again and impose the first back-to-back rate hike since 2004.

It’s not all bad news for borrowers.

It’s interesting to see that demand for long-term residential fixed rates is driving lenders to offer more 10-year fixed rate products with Halifax launching a 1.68% 10-year fixed rate for homebuyers with a 40% deposit and Lloyds Banking Group an even more competitive rate of 1.66% for borrowers with a 40% deposit.

At a time when interest rates are rising it may be tempting to lock into this low rate for longer although borrowers need to be aware of the early repayment charges which lenders can levy if they are to redeem the mortgage before the 10 years is up.”

Simon Gammon, Managing Partner at Knight Frank Finance, said:

“Borrowers on variable rates will see an almost immediate increase in their outgoings amid a worsening cost of living squeeze.

Variable rate mortgages account for about a fifth of all mortgage debt, or about £300 billion.

More broadly, mortgage rates have been ticking upwards since late 2021 but remain exceptionally low by historic standards.

There has been some movement since December’s hike, but not a lot.

Lenders begin the year with new targets, eager to build market share, which has given borrowers a temporary reprieve.”

Richard Hayes, CEO and co-founder of online mortgage broker, Mojo Mortgages, said:

“Given the rise in inflation we’ve seen over recent months, it is no surprise to see the Bank of England increase interest rates to 0.5% today.

This will undoubtedly have an impact on homeowners, particularly for those with mortgages on standard variable rates, although for many the costs will not be felt until further down the line.

The majority of mortgage borrowers are on fixed-rate deals so they will only see changes when their current term ends.

However, for those due to remortgage soon, it would be worth speaking to a broker as soon as possible to secure a new rate before the market feels the effect of the rise.

We expect to see the rise in mortgage rates to be controlled to limit the impact on homeowners, but at a time when other household expenses are rising at record levels the squeeze on spending will be felt by many.

The property market remains buoyant, and January saw the fastest rise in year-on-year house prices for 17 years, so it will be interesting to see if the rates rise dampens the demand from buyers.

Rates will inevitably rise over the coming months.

How much depends on whether today’s hike has the required dampening effect on inflation, but it’s highly likely we’ll see more base rate rises over the course of the year.

That will transform pricing in the mortgage market and those that don’t act soon will wish they had done in only a few months.”

Giles Coghlan, Chief Currency Analyst at HYCM, said:

“The Bank of England’s (BoE) decision to raise interest rates today was expected.

Recent warnings that inflation could peak at close to 6% by April has the bank acting quickly to raise rates, while Goldman Sachs gave their BoE projections an upgrade this week, recognising that policymakers had their hands tied.

This may well turn out to be the quickest interest rate move in 25 years, as the BoE know that this is the only weapon against surging inflation.

Although supply chain issues may have kicked off the inflation narrative, the current wage-price spiral, coupled with high energy prices, have given the MPC a sense of urgency.

Whereas the Reserve Bank of Australia, who met this week, consider that inflation is transitory, a wage-price spiral is what the Bank of England fear.

If inflation enters wages, then companies will charge higher prices and we could see a ‘spiralling’ effect of even higher wages prompting still higher prices.

As the Covid outlook improves, expect two further hikes this year, though the BoE may be less hawkish than this move may imply going forward.”

Director of Henry Dannell, Geoff Garrett, commented:

“There’s a whole generation of homebuyers who have never known anything other than a sub one per cent base rate and so a second increase in such quick succession could understandably come as a concern.

However, all things considered, the current landscape for those looking to borrow is still very good and locking in a favourable fixed rate now is the best way to avoid any nasty surprises further down the line.”

Managing Director of Sirius Property Finance, Nicholas Christofi, commented:

“We’ve already seen the mortgage market react to today’s increase in interest rates and so those looking to purchase a property may find the deal they had on the table isn’t quite as appetising as it was.

That said, there remains a wealth of very good options available and so there’s no reason they shouldn’t be able to secure the property they want at a rate that is affordable for them.”

CEO of Octane Capital, Jonathan Samuels, commented:

“While today’s increase in interest rates is unlikely to phase the average homebuyer, it could weigh heavier on the minds of the nation’s landlords.

Not only do they already pay far higher mortgage rates but they’re also subject to stricter affordability requirements.

So if interest rates do continue to climb, they may face an increase in costs which will inevitably be passed on to the tenant.

However, sector investment remains strong and current market conditions have seen landlords benefit from some very favourable levels of rental and capital appreciation of late.

The majority will also be protected in the form of a fixed-rate mortgage, so it’s likely that they will simply absorb today’s hike.”

Michael Bruce, CEO and Founder of Boomin, says:

“With recent figures showing inflation is at a thirty year high, a swift response from the Bank of England was only to be expected and there’s a good chance it’s not the last we’ll see this year.

This will no doubt bring cause for concern for those on a variable rate mortgage who could now see their monthly mortgage costs start to climb.

With many already feeling the squeeze due to the increased cost of living this could bring further financial turmoil and so now is the time to act if you feel this is the case.

While a fixed-rate term won’t remain in place forever, it will bring a good deal of certainty and relief in the short to mid-term.

The government needs to act to ensure that there is a healthy property market to stimulates the health of the wider economy.

We cannot afford to allow inflation and interest rates working in tandem to slow the property market and reduce home mover confidence.”

Managing Director of Barrows and Forrester, James Forrester, commented:

“Before we head for the hills, it’s important to note that this is only the second interest rates increase since August 2018 and we’re a far cry from the apocalyptic double-digit rates of the late 80s and early 90s.

The market has arguably never been better for those looking to borrow and it will take far more to derail the freight train of house price growth seen over the last two years.”

Director of Benham and Reeves, Marc von Grundherr, commented:

“Another marginal increase in interest rates is unlikely to dampen the house price party that UK homebuyers have been enjoying since the beginning of the pandemic and while the general expectation is that they may hit one per cent, this won’t materialise until the end of the year at the very earliest.

We expect a strong level of foreign demand to return to the market in 2022 and this will also help boost the market considerably regardless of what happens with interest rates.

Many foreign buyers, particularly across Asia, tend to finance their investments with banks closer to home, in Hong Kong or Malaysia for example.

So UK interest rates won’t have a huge influence on them as most are already paying around three to four per cent and are happy to do so.”

Susannah Streeter
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
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Susannah Streeter
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

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