Interactive Investor expert analyses decision to raise interest rates
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
Despite a fall in the inflation rate, the Bank’s Monetary Policy Committee (MPC) hiked the base rate 0.5 percentage points to 3.5 percent – its highest level for 14 years. The rise will add hundreds of pounds to monthly mortgage payments of millions of homeowners.
Josie Dent, managing economist at the Centre for Economics and Business Research, said it meant “many of these households will have to cut back spending in other areas, leading to weaker economic activity.
“However, concern was also expressed that a tight labour market could lead to more persistent inflation, justifying further interest rate rises.”
Joanna Elson, boss of the charity Money Advice Trust, said: “Households are under pressure from all directions as the sustained impact of high food, fuel and energy costs continues to stretch people’s budgets to the limit.
Tough “With interest rates rising further, this will only add to the worries of millions of people as we head towards the New Year.
“For the majority of homeowners who are on fixed-rate mortgages the effect won’t be felt straight away but for those on variable rates, the impact will be felt more immediately.
“Higher mortgage payments are also likely to add to higher rents with landlords passing rate rises on.”
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 face an extra £250 every month on average as they switch to higher rates.
A typical household in this situation will be paying 17 percent of pre-tax income on servicing the mortgage, up from 12 percent.
Four million owner-occupiers with mortgages – half the total – will be affected by hikes over the next 12 months. That includes 1.7 million on variable rates and those with fixes due to end.
Payments will rise by at least £100 a month for 2.7 million owners.
The Bank was split three ways on the best way to curb inflation, which stood at 10.7 percent in November.
Six members voted in favour of the 0.5 percentage point rise.
However, Catherine Mann wanted a bigger hike and two, Silvana Tenreyro and Swati Dhingra, voted for a pause in tightening.
Bank of England Governor Andrew Bailey has been under fire for allowing inflation to reach a 41-year high of 11.1 percent in October, more than five times the Government’s two percent target.
The pound, which hit a six-month high against the dollar this week, was down over one percent on the day to below $1.23 after the decision.
Chancellor Jeremy Hunt said: “High inflation, exacerbated by Putin’s war in Ukraine, continues to plague countries across the world, eating into people’s pay cheques and driving up food and energy prices.
“I know this is tough 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.”
Mr Bailey expects inflation to fall in coming months.
He said: “We think we’ve seen possibly this week the first glimmer, with the figures released this week, that it’s not only beginning to come down but it is a little bit below where we thought it would be…but there is a long way to go.
“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 supply in this country is so tight.
“That is why we had to raise interest rates now because we see that risk as really quite pronounced.”
Source: Read Full Article