The Bank of England has increased interest rates to a 13-year high of 1% at its latest meeting, a hike of 0.25 percentage points, as it attempts to battle rampant inflation.
According to figures from the Office for National Statistics (ONS), inflation – as measured by the consumer price index (CPI) – stood at 7% in March, its highest level in more than 30 years.
The Bank now predicts this figure will rise to just over 9% during the second quarter and move higher still in the second half of the year, averaging slightly more than 10% at its peak in the fourth quarter.
Source: Office for National Statistics
The latest attempt to battle higher prices was not unexpected, as the Bank has hiked rates three times since December, first from 0.1% to 0.25%, followed by two subsequent 0.25 percentage point increases.
However, there is a clear divergence in the possible paths the bank could take, which was reflected in the split of the vote, with three members preferring to take a more aggressive stance and increase rates to 1.25%.
Although the Bank will hope that it reduces costs and allows people to earn money from their savings, the move is likely to exacerbate the cost-of-living crisis many people are suffering from at present.
Oil prices have more than doubled in the past year, causing a spike in heating costs, which was made worse by the removal of the energy price-cap by the chancellor in April.
Hinesh Patel, portfolio manager at Quilter Investors, said that the move today “resembles shuffling deck chairs on the Titanic”, but Nicholas Hyett, investment analyst at Wealth Club, claimed the Bank was “stuck between a rock and a hard place”, trying to fight inflation while limiting the damage to ordinary people.
Nutmeg savings and investment specialist Kat Mann said some people may view the rate rise decision today as a “further blow”, but with CPI more than three times that of the Bank’s 2% target, “it needed to act to attempt to bring inflation under control”.
One group that will be adversely affected are those on tracker or standard variable rate mortgages, representing approximately a quarter of UK homeowners.
Martin Lawrence, director of investments at Wesleyan, said: “Following today’s announcement, households already struggling to make ends meet could end up potentially paying hundreds of pounds more in annual repayments,” he said.
Rachel Springall, finance expert at Moneyfacts.co.uk, said borrowers sitting on a variable rate may want to lock into a competitive fixed-rate mortgage deal to protect themselves from rising interest rates. At present the average two-year fixed rate has just surpassed 3% and may continue to rise.
On the positive side, savings rates could improve following this rate rise, yet Springall said that loyal savers who have an easy-access account with one of the biggest high-street banks (including Barclays, HSBC, Halifax, Santander and Natwest) have had little benefit from base-rate rises, as many of these brands have passed on just 0.09 percentage points since December 2021, while none have passed on all three increases.
Les Cameron, financial expert at M&G Wealth, noted that with high levels of inflation, a modest increase to savings rates would still mean most cash or near-cash savers, for example those in National Savings & Investments accounts, would see their wealth being eroded in real terms.
Lawrence added: “For those who have savings – and particularly for the fifth (21%) of UK savers who have nearly all of their savings in a standard bank account – it is ever-more important to think about what they can do to help protect their money from inflation’s effects, including options like investing.”
However, Hyett warned that investing is also a challenge, as higher rates are bad news for property, stocks and bonds, especially if paired with an economic downturn.
“But rising inflation means cash is no safe haven either. Investors, like rate setters, could be left looking for a least-worst option,” he said.
The Bank of England’s rate rise came on the back of the Federal Reserve’s decision to up rates in the US by 0.5 percentage points to 1% – the first such increase since 2000.
Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, said there was no “shock and awe” from the market in response, but the Fed did clearly signal that there would be more 50-basis-point hikes ahead.
“While a sharper tightening could easily be justified against a backdrop of full employment and undesirably high inflation, the Fed appears to have prioritised growth over inflation and easing the economy into, ideally, a soft landing,” he said.
Although the overall tone was hawkish, chair Jerome Powell ruled out scope for a 75-basis-point hike for now.
Charles Hepworth, investment director at GAM Investments, said the market has priced in rates at just over 3% for the start of next year, or 2 percentage points higher than today.
However, Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said the Fed will likely hike rates more slowly than what the market expects.
“The Fed committed a policy mistake last year by letting inflation run out of control, and as a result, it could be walking a narrow road for some time as it looks to balance the tightening path without creating an accidental recession,” he said.