Yahoo Finance Bank of England raises UK interest rates to new 15-year high
The Bank of England has increased interest rates by 0.25% to 5.25%, its 14th consecutive hike, as it aims to combat high inflation.
The move, which was widely expected by economists, means UK interest rates are now at a fresh 15-year high.
The Monetary Policy Committee (MPC) voted in a three-way split over the rate rise, with six policymakers choosing to lift Bank rate to 5.25%. They were governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, new member Megan Greene, chief economist Huw Pill and Dave Ramsden.
Jonathan Haskel and Catherine L Mann voted to increase Bank Rate by 0.5 percentage points while Swati Dhingra was the most dovish member, wanting to keep the rate at 5%.
Financial markets now expect interest rates to peak at 6.5% after recent data showed record wage growth, however, some predictions have since fallen to a pinnacle of 5.75% after a sharp decline in inflation.
The Bank also warned on Thursday that interest rates will remain high for at least two years, while it downgraded its expectation for GDP growth for this year from 0.75% to 0.5%.
“Once more, the Bank of England has made the wrong choice. Inflation remains high, not because of pay increases but as a result of "rampant profiteering" and "greedflation", with the UK's top 350 companies rubbing their hands while raking in an average increase in profit margins of 89%," Sharon Graham, general secretary at Unite the Union, said.
"There is no doubt — workers and their families are continuing to pay the price in this cost of living crisis. The economy is not working for everyday people and we need to make different choices. Until profiteering is tackled there can be no respite from continuing inflation.”
Read more: Gold gains reverse after US credit rating downgrade
UK inflation dropped to a 15-month low of 7.9% in the year to June — the lowest reading since March 2022. Economists predicted that the rate would dip to 8.2% from 8.7% in both April and May.
While the rate of inflation is slowing, it is still nearly four times more than Threadneedle Street's 2% target, and higher than in other advanced economies.
Prime minister Rishi Sunak also fuelled concern on Wednesday after saying inflation was not falling as fast as he would like. On Thursday the Bank said it was forecasting that inflation will hit its 2% target in the second quarter of 2025.
"Our job is to make absolutely sure that inflation falls all the way back to the 2% target, and stays low," Andrew Bailey said.
He added: "We do recognise, and I think it’s very important to say, that inflation has a very serious effect particularly on those least well off.
"But I will emphasise that the economy is more resilient. Yes unemployment has gone up a bit, but it is still at historically low levels. We haven’t experienced a recession and we’re not forecasting one."
Watch: What is a recession and how do we spot one?
Meanwhile, chancellor Jeremy Hunt said: “If we stick to the plan, the Bank forecasts inflation will be below 3% in a year's time without the economy falling into a recession.
“But that doesn't mean it's easy for families facing higher mortgage bills so we will continue to do what we can to help households."
The hike will also mean further pain for mortgage rates. Higher mortgage rates are ready starting to weigh on the UK property sector, where prices are falling by the most since 2009.
For the roughly 150,000 borrowers on tracker or variable rate mortgages in London, today's hike means an instant hike in mortgage payments.
However, for the majority of homeowners who are on fixed-rate deals, the effect will not be felt until their fixes expire.
Read more: UK rents soar at fastest rate since 2016 as house price growth slows
Marc von Grundherr, director of Benham and Reeves, said: “A fourteenth consecutive base rate hike will come as yet another nail in the coffin for the nation’s borrowers and will do little to boost a property market that has been treading water in recent months.
"We have seen some positive signs in recent weeks with mortgage approvals climbing. However, while this boost in market activity is good news, higher interest rates are likely to stifle the purchasing power of the nation’s buyers even more, resulting in the further stagnation of house prices.”
It comes as the US Federal Reserve raised rates to 5.5% last week, the highest since 2001, while the ECB lifted rates to 4.25%, both also opting for 25bps rise.
Watch: How does inflation affect interest rates?
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