More pain for borrowers as interest rates hit 5.25%

The UK’s interest rate has been raised to 5.25% by the Bank of England, as it continues trying to control soaring prices.

This means the Bank has increased the rate by 0.25% from 5% – the 14th hike in a row; the last time the base rate was this high was in April 2008.

The MPC said it will “ensure that Bank Rate is sufficiently restrictive for sufficiently long”, clearly indicating that rates could plateau above 5% across next year into 2025.

However it is also implicitly acknowledging that at 5.25%, rates are now close to their peak in this cycle of 14 rises.

Today’s quarter point rise and the fact that rates will stay high for some time is to temper inflationary pressure emerging from the jobs market, a less weak economy, and the service sector.

As the Bank concludes, “some of the risks of more persistent inflationary pressures have begun to crystallise”.

Here are some expert comments:

Paresh Raja, CEO of Market Financial Solutions, said: “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.”

Lily Megson, Policy Director at My Pension Expert, said: “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.”

Mohsin Rashid, CEO of ZIPZERO, said: “Although inflation is finally showing signs of slowing, another interest rate hike is a daunting prospect for consumers. As the Bank of England (BoE) seeks to limit spending in the economy, households have to contend with surging mortgage payments, while those reliant upon borrowing to afford record rent and food costs are met with costly repayments.

“At the same time, a core tenet in the BoE’s strategy – encouraging people to put money aside – is being criminally undermined by many banks which are failing to pass on rising rates to their customers. No increase in the base rate is worthwhile if consumers don’t see value in saving, though it is encouraging to see the regulators finally cracking down on this.

“Households understand that it is the BoE’s responsibility to control inflation. However, the other wing of the UK economic high command, the Treasury, must ask if it is right that the pain being felt is universal and consider what support it can offer to households which are most struggling.”

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “There has been a huge difference between the base rate and the interest rates made available to savers by high street banks. As inflation remains elevated, it is critically important that savers have access to competitive rates. Positively, as of Monday, the new Consumer Duty rules mean that all banks will be under more pressure to do right by consumers and pass on today’s interest rate increase to savers without undue delay.

“Time and time again, challenger banks have proven themselves to be more reliable at providing customers with competitive products as interest rates change. Consumers should not just assume that their bank will offer them the best deal. Searching the market for alternative products remains vitally important, and branching out from established high-street names remains one of the best ways for people to lock in a better deal.

“For people in a position to put away a lump sum, there are a number of fixed-rate products currently topping the base rate that savers can make the most of to grow their money. Crucially, these are covered by the same Financial Services Compensation Scheme (FSCS) protection in the same way as traditional banks, which will offer consumers security and peace of mind.”

Chieu Cao, CEO of Mintago, said: “Another interest rate hike, another sucker punch that will leave millions reeling.

“We can be sure employers and managers are seeing the headlines about those drowning in skyrocketing debt and repayments, but how many have actually taken action to support their employees through these challenging times? In fact, how many even know which of their staff are struggling with issues such as higher interest rates and the cost-of-living crisis?

“Unfortunately, too many businesses are not having the right conversations with staff – talking about financial stress remains a workplace taboo, and people’s wellbeing is being harmed as a result. But now is the time to step up. There is no use pointing the finger of blame at the Bank of England, government, banks or anyone else. Business leaders must understand the critical role they can play in supporting employees at this time – prioritising financial wellbeing over other light-touch perks and benefits is a must in the current climate.”

 
Brian Murphy, Head of Lending at Mortgage Advice Bureau, says: “After a positive inflation reading last month, many would have hoped for a pause in interest rates rising. However, it was not to be the case. The Bank of England has decided that more needs to be done to stamp out the stickiness of inflation in the economy. In doing so, mortgage holders may need to hold out a bit longer.

“Many will be hoping that we are nearing the peak of interest rate hikes. Rates on fixed-term products have been dropping marginally in the past few weeks, and there remains hope that they will continue to do so, despite the decision to increase overall rates for a 14th time in a row.”
 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “The Bank of England (BoE) hiked base rate again today as it continues to battle inflation. The base rate is now 5.25%, a 15-year high, following the decision of the Monetary Policy Committee (MPC) to increase it by 0.25%.

“The end of the hiking cycle could now be in sight amid signs inflation has turned the corner, but that doesn’t mean interest rates will start falling any time soon. Irradicating inflation will take patience and persistence from the BoE and households will continue to face higher borrowing costs for some time.

Was this rate rise expected?

Ahead of today’s meeting some economists felt the Bank might opt to send a stronger signal with a chunkier 0.5% rise. However, most commentators believed the lower-than-expected inflation data for June afforded it more wriggle room.

The MPC can now monitor data further, consider the lagged effects of the tightening so far and look to reduce the risk of going too far and inflicting more pain than necessary on the economy. Encouragingly, there are early signs of slack in the job market and factory gate prices stabilising, so it is likely that inflation will fall quite rapidly from this point and start to make the Bank’s job easier.

What will happen to interest rates next?

The Bank of England has left the door decisively open to further hikes in upcoming meetings as it is still worried about inflation. Consumer Price Inflation (CPI) fell faster than expected in June, dropping to 7.9, but it remains nearly four times the BoE’s target of 2%, and double the rate in the US. From here rates are likely to rise a little more to ensure rising prices are kept in check and after that they will likely plateau for a period.

Market expectations for the peak rate have receded in recent weeks thanks to June’s CPI surprise. Having reached 6.5% on July 11th in the wake of data showing record wage growth, the latest consensus is 5.75% by the year end. From that point markets are pricing in rates remaining at this sort of level for a while with no significant cuts coming in the first half of 2024. Today’s announcements have not adjusted these market expectations significantly.

What does it mean for household finances?

Irradicating inflation will take more time and persistence from the Bank of England. That means households getting used to structurally higher interest rates and borrowing costs.

This will have progressively greater knock-on consequences for consumer spending as the months go by as more mortgages roll off cheap short term fixes secured at lower rates and households incur a hit to their disposable income. The housing market is also likely to come under further pressure as it becomes collateral damage in the Bank’s quest to bring down inflation. Market values are sensitive to the cost of debt and the cracks are now beginning to appear with a near 5% drop in average prices since last summer’s peak.

The surge in rate expectations has already pushed mortgage costs to their highest since 2008 and today’s base rate rise will immediately impact those on tracker mortgages. Of greater importance to those seeking fixed rate deals is market expectations of the trajectory of rates over the next couple of years and beyond. That hasn’t changed much following today’s interest rate rise and BoE guidance.”