More pain for Britons as Bank of England hikes interest rates to 3.5%

The Bank of England today hailed a ‘glimmer’ of hope with inflation ‘beginning to come down’ and the economic slowdown not as bad as feared – but still hiked interest rates again.

Governor Andrew Bailey suggested the headline CPI has peaked, pointing out it was lower than predicted at 10.7 per cent this week.

He said it was likely to fall ‘more rapidly’ from the late Spring, while the Bank also now expected GDP to fall by just 0.1 per cent in the current quarter – rather than the 0.3 per cent it pencilled in just last month.

That leaves it on a knife edge whether the UK is formally in recession, defined as two consecutive quarters of contraction. 

However, Mr Bailey warned that significant upward pressures on wages meant that the Monetary Policy Committee still needed to increase interest rates from 3 per cent to 3.5 per cent.

It is the ninth successive increase, taking the level to a 14-year high and heaping more pain on mortgage-payers.

The committee’s report also made clear that further rises are likely to be needed.

But markets are now betting that the inflation dipping from 11.1 per cent in November means they might not go as high as previously feared. 

Chancellor Jeremy Hunt endorsed the ‘action’ to crack down on prices.

‘I know this is tough for people right now, but it is vital that we stick to our plan, working in lockstep with the Bank of England as they take action to return inflation to target,’ he said.

‘The sooner we grip inflation the better. Any action which risks permanently embedding high prices into our economy will only prolong the pain for everyone, stunting any prospect of economic recovery.’

The Monetary Policy Committee is expected to push the base rate from 3 per cent to 3.5 per cent when their decision is announced at noon

The Monetary Policy Committee is expected to push the base rate from 3 per cent to 3.5 per cent when their decision is announced at noon

Bank of England Governor Andrew Bailey has warned the ‘economic environment is challenging’

The MPC voted for the 0.5 percentage point increase by a margin of 6-3, with two members preferring to keep the rate at 3 per cent and one backing a 0.75 percentage point move.   

Last month the committee opted for a 0.75 percentage point bump – the biggest since 1989. Less than a year ago the rate was still just 0.1 per cent.

Speaking to broadcasters after the announcement, Mr Bailey said: ‘We think we’ve seen possibly this week the first glimmer that with the figures that were released this week it’s not only beginning to come down but in fact it was a little bit below where we thought it would be.

That is obviously very good news, but there’s a long way to go. We expect that to happen by the way, we expect inflation to start falling more rapidly probably from the late spring onwards.

‘But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight.

‘That is why really we had to raise interest rates today because we see that risk as really quite pronounced.’

What the interest rate rise means for you

The rate rises are inflicting pain on many mortgage borrowers, who are seeing the cost of variable deals and new fixed rate deals rise rapidly. 

However, rising interest rates have been good news for savers, with interest rates paid on accounts rising to levels not seen for more than a decade.

This is Money’s analysis: What the 0.5% base rate rise means for you

The pound dipped against the dollar on the news, as traders priced in a softer stance on rates for next year.

It was down almost 1 per cent before clawing back some ground to 1.232. Sterling was riding high after being boosted on Tuesday when US inflation figures came in below expectations.

The MPC said household consumption has remained ‘weak’ and it has seen the housing market ‘continue to soften’.

However, it also pointed out that wage growth in the private sector has been faster than it expected – while still not keeping pace with inflation.

The committee cautioned that its rate-rising activities are probably not over.  

‘The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target,’ the report said. 

Figures earlier this week showed regular pay, excluding bonuses, rose by 6.1 per cent in the three months to October – a record outside of the pandemic – as firms are under increasing pressure to increase earnings.

But wages continued to be outstripped by rising prices, falling by 3.9 per cent taking CPI inflation into account.

Earlier this week the Bank warned that millions of mortgage holders are set to see their bills soar next year.

People with a fixed-rate home loan due to expire by the end of 2023 facing laying out an extra £250 every month on average as they switch to higher interest rates.

A typical household in this situation will be paying 17 per cent of pre-tax income on servicing the mortgage, up from 12 per cent.

Four million owner-occupiers with mortgages – half the total – will be affected by hikes over the next 12 months. That includes 1.7million people on variable rates and those with fixes due to end.

Payments will increase by at least £100 for 2.7million. 

The Bank’s latest Financial Stability report said that it likely to trigger more defaults amid the wider cost-of-living pressures.

However, it insisted the financial system can cope with the extra strain as UK banks and building societies are prepared, with strong balance sheets and high profits.

Governor Andrew Bailey said the ‘economic environment is challenging’ but stressed that households are better placed to deal with this than during the 2008 ‘Credit Crunch’.

Mr Bailey has sought to cool market expectations for how high interest rates would ultimately increase at the previous meeting, amid improvements in the value of the pound and government borrowing rates since September.

Deutsche Bank has suggested that rates could push as high as 4.5 per cent next year, drifting from 5.25 per cent signalled by the Bank itself last month.

But experts at ING and Investec have been even more dovish, both predicting that the rate will peak at 4 per cent next year.

ING’s James Smith, Antoine Bouvet and Chris Turner said in a note to investors: ‘When the Bank of England hiked by 75 basis points for the first time back in November, it seemed obvious that it would be a one-off move.

Four million owner-occupiers with mortgages - half the total - will be affected by hikes over the next 12 months, according to the Bank

Four million owner-occupiers with mortgages – half the total – will be affected by hikes over the next 12 months, according to the Bank 

‘The forecasts released back then suggested that keeping rates at 3 per cent would see inflation overshoot (just) in two years, while raising them to 5 per cent would see an undershoot.

‘In other words, we should expect something somewhere in the middle, and that’s why we think Bank Rate is likely to peak at 4 per cent early next year.’

They predicted that interest rate hikes could stop in February but suggested that continued wage pressures in the labour market meant the Bank could be ‘less swift to cut rates than the US Federal Reserve’.

Ms Horsfield said that with falling inflation and the UK likely to be deep in a recession throughout 2023, ‘such a trajectory should allow room for the Bank to start cutting rates again towards the end of 2023, even if inflation is still above target at that point’.

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