The Bank of England (BoE) has increased interest rates to 0.5% from 0.25% as it looks to restrain a surge in the cost of living. With inflation soaring, the Bank opted to increase rates at successive policy meetings for the first time since 2004.
Forecasts suggest inflation, as measured by the consumer prices index, is set to peak at 7.25% in April, and average at around 6% across the whole of 2022 – far exceeding the BoE’s 2% inflation target. Having increased rates from a record low of 0.1% in December, some members of the Bank’s Monetary Policy Committee (MPC) wanted to see an even bigger increase yesterday, with four of the nine members voting to increase rates to 0.75%.
Commenting on the increase, Paul Broadhead, Head of Mortgage and Housing Policy at the Building Societies Association (BSA) said “Given the rising costs of living, including the increase in the energy price cap that we have seen this morning and the tax hikes coming in April, the Bank Rate rise will be unwelcome news for many. It is helpful that eight in ten mortgage holders are on a fixed rate as these people will continue to pay the same each month until their fixed rate period ends. The 20% on variable rate mortgages are likely to see their payments rise, but whilst this is the second rate rise in three months, the increase in their mortgage payments will be modest.”
“Lenders are sensitive to the rising number of people facing a squeezed household budget and the advice to anyone worried about their ability to pay their mortgage, particularly on top of energy and food price rises, is to get in touch with their lender early. Lenders will do everything possible to help.”
Paul Heywood, Chief Data & Analytics Officer at Equifax said “Whilst savers will have rejoiced today over the first consecutive rate hike since 2004, the same cannot be said for those with personal loans. Equifax data shows that arrears and defaults for consumer credit and motor finance are once again starting to rise, suggesting that financial pressures amongst consumers are beginning to build up.”
“When matched with the forecast* that inflation will soar past its current 5.4% state in 2022, fuelled by energy and goods prices, there is no better time for lenders to conduct proper affordability assessments via Open Banking to protect consumers from later stage debt and extended periods of forbearance.”
Federation of Small Businesses (FSB) National Chair Mike Cherry said “A lot of small business owners will be feeling a double hit today. First off, exclusion from the Chancellor’s statement regarding support for those struggling with energy bills. And second, a rate rise that will increase repayments on a good deal of personal and professional debt, adding to existing cashflow woes just as tax rises loom.”
“The Government is right to help households with rising costs. It should be helping the smallest firms too, which face many of the same challenges as consumers in the energy market, but without the same protections. The household rebate should be matched by an equivalent business rates rebate, to help the smallest firms which have been weathering these price increases for months already, and which desperately need a measure of protection from the energy crisis storm.”
“Planned support via the council tax system will leave struggling community cafes, convenience stores and restaurants wondering, where is the support via the business rates system? Equally, where is the help to spread bills for the small businesses that create jobs and ensure growth in local economies? These are the very businesses which will be key to the success of the levelling-up agenda, yet the day after it was launched they’ve been left out in the cold.”
“With regards to the discretionary funding available to local authorities, we’d urge a rethink so authorities could also consider the needs of the local small firms which protect the livelihoods in their communities. Giving local authorities more autonomy in this area would also be in-keeping with the levelling-up proposals.”
“The interest rise announced today will pile yet more stress on small business owners struggling with debt. The hope, against a backdrop of spiralling utility bills and surging inflation in the round, is that it goes some way to putting the brakes on rising prices.”
“The back-to-back rate increases will mean more pain for all those with personal and professional debt that carries a floating rate. Where emergency loans are concerned, repayments on bounce-back loans are fixed, but anyone with a coronavirus interruption loan could be significantly impacted by this move.
“To minimise the risk of sending viable businesses to the wall, the Government should expand Pay As You Grow to cover CBILS as well as bounce-backs. We’d also encourage policymakers to look again at our proposals to enable those with emergency debt who are just about clinging on to convert bounce back loans into employee equity stakes, thereby alleviating pressures on small firms and spurring productivity.”
“On top of all the struggles that small firms are facing, the Government is set to impose a sharp rise in National Insurance contributions and dividend taxation, hitting everyone who works for a living, and all businesses regardless of their current profitability. It’s not too late for a change in course – but it must come sooner rather than later.”
Kitty Usher, Chief Economist of the Institute of Directors, said “Business leaders are worried about inflation, and they – rightly – believe it is the Bank of England’s job to get it under control. For that reason, the Bank has lost some credibility among business leaders from its too-cautious projections of inflation over the last few months and its failure accurately to interpret the labour market data around the end of the furlough scheme in the autumn.”
“Today’s decision therefore needed to surprise on the upside to show markets, and wider business leaders, that it was serious in doing the job it is there to do. It seems that 4 members of the 9-strong Monetary Policy Committee shared this view, and voted for a rise to 0.75%, but this group remained in the minority.
“Therefore, because today’s decision was widely in line with market predictions, the jury is still out as to whether it was sufficiently dramatic to bring expectations of inflation down in the way that is needed to change behaviour and get a handle on the situation.”
“The Bank’s own central projection is that annual inflation will peak at 7.25% in April 2022. If in future weeks that, too, looks out of kilter with the data as it comes in, then today’s decision will not have done much to improve the Bank’s dented credibility among business leaders.”
“Business leaders are worried about inflation, and they – rightly – believe it is the Bank of England’s job to get it under control. For that reason, the Bank has lost some credibility among business leaders from its too-cautious projections of inflation over the last few months and its failure accurately to interpret the labour market data around the end of the furlough scheme in the autumn.”
“Today’s decision therefore needed to surprise on the upside to show markets, and wider business leaders, that it was serious in doing the job it is there to do. It seems that 4 members of the 9-strong Monetary Policy Committee shared this view, and voted for a rise to 0.75%, but this group remained in the minority.
“Therefore, because today’s decision was widely in line with market predictions, the jury is still out as to whether it was sufficiently dramatic to bring expectations of inflation down in the way that is needed to change behaviour and get a handle on the situation.”
“The Bank’s own central projection is that annual inflation will peak at 7.25% in April 2022. If in future weeks that, too, looks out of kilter with the data as it comes in, then today’s decision will not have done much to improve the Bank’s dented credibility among business leaders.”
Tommaso Aquilante, UK Lead Economist at Dun & Bradstreet, said “Today’s Bank of England announcement to raise interest rates to 0.5% was expected. However, the fact that four out of nine Monetary Policy Committee members voted to increase the rate to 0.75%, indicates that the BoE is committed to limiting the erosion of purchasing power driven by price increases and also to bringing inflation back to target (2%). Although today’s increase still leaves interest rates at historically low levels, the hike is likely to be felt by households and businesses.”
“Businesses, especially those that trade internationally or use suppliers that operate in international markets, will need to act to hedge against potential financial risk triggered by appreciations in the GBP/USD or GBP/Euro exchange rates. While such appreciations could make UK exports less competitive, they could also stimulate imports, thus impacting business’ bottom line.”
Susannah Streeter, Senior investment and Markets Analyst at Hargreaves Lansdown said “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.”
“Prices are forecast to shoot up much higher than the bank’s previous forecasts, peaking at 7 ¼% 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.”
Richard Pike, Phoebus Software Sales and Marketing Director, said “The interest rate rise by the Bank of England today is no surprise to anyone given the way that inflation is spiraling upwards. However, the fact that the vote was so tight and those in the minority wanted to increase to 0.75% is telling for the next meeting. If the Bank starts to raise rates in increments of 0.5% it will not take long for the increase to have a marked effect on mortgage interest rates.”
“The cost of living is rising and, with the price of gas and electricity set to increase further, this could be a tough year for many. Although mortgage arrears fell at the end of 2021 the squeeze on finances is likely to be telling in the next few months. Lenders need to concentrate on arrears and collections and ensure they are working to ‘TCF’ guidelines and within approved forbearance parameters. There will be some households that are already finding it hard and lenders should be looking forward and ensure they are communicating with their borrowers before situations get too bad.”
Neil Kadagathur, Co-Founder and CEO of Creditspring, said “A rate rise is arguably the right thing for the Bank of England to be doing right now. We are heading into a cost-of-living crisis. It’s looking more and more likely that the government is going to have to step up its support of people, and if inflation is out of control, this won’t be possible.”
“However, the rate increase will affect people differently. For renters, their landlord’s increased mortgage costs will take longer to be passed through to their rental costs, and those on low disposable incomes should also benefit if the rate rise slows down the increase in cost of key goods.”
“At the same time, there are millions of households who will face extra strain as a result of today’s announcement. With borrowing about to get more expensive. homeowners particularly will struggle, as will the more than a quarter of households who will have to borrow to survive over the next few months. And with inflation soaring to much higher levels than interest rates, many are still in worse financial shape than they were this time last year.”
Stuart Anderson, Chief Commercial Officer at Target Group, says: “Following on from January’s inflation reaching its highest level in 30 years, today’s interest rate rise is a clear attempt to ease the current cost of living crisis. But it will have secondary effects that cannot be ignored too.”
“Today’s announcement may come as a relief to savers, but homeowners and those with loans will now have to make their income stretch even further to cover increasing debt repayments. This is no doubt an incredibly stressful period for many and providers need to have this in mind when interacting with customers.
“As well as considering the financial strain, it’s equally as important for firms to consider the emotional and psychological implications that increasing costs and debt can cause for their customers.”
“Banks and lenders over the coming months will need to pay particular attention to forbearance, providing a sympathetic approach to dealing with vulnerable customers by offering reduced payment plans, providing information and help to strengthen their relationship with their finances.”