Yahoo Finance Bank of England hikes UK interest rates to 5% to combat sticky inflation
The Bank of England (BoE) has increased UK interest rates for a thirteenth consecutive time, announcing a 0.5% hike to 5%.
Rates are now at a 15-year high as the Bank looks to combat high inflation and cool the cost of living crisis.
Members of the Monetary Policy Committee (MPC) voted 7-2 to hike rates with Swati Dhingra and Silvana Tenreyro preferring to hold the bank rate at 4.5%.
BoE governor Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill and Dave Ramsden all voted in favour of the proposition.
Financial markets are betting on at least another four 25bps hikes still to come, making for a terminal rate of 6% by the end of the year.
Read more: FTSE 100 plunges as Bank of England raises interest rate to 5%
"We’ve raised rates to 5% following recent data which showed that further action was needed to get inflation back down," Andrew Bailey said on Thursday.
"The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it.
"We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.
He added: "We are committed to returning inflation to the 2% target and will make the decisions necessary to achieve that."
Chancellor of the Exchequer Jeremy Hunt said: “High inflation is a destabilising force eating into pay cheques and slowing growth. Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down.
“Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later”.
Read more: Why the Bank of England may have to create a recession
Matthew Ryan, head of market strategy at Ebury, said: “The BoE has been backed into a corner, and will have no choice but to continue raising interest rates aggressively in the coming meetings.”
Meanwhile, Mike Riddell, head of Macro Unconstrained at Allianz Global Investors, said Threadneedle Street had “little choice” than to continue hiking rates.
Watch: What is a recession and how do we spot one
Higher interest rates will benefit savers but will mean more hurt for borrowers, especially at a time when mortgage holders are already facing sharp increases in costs if they require a new deal.
Taking the interest rate to 5% will hit more than a million mortgage holders whose fixed-rate deals are due to expire soon. A quarter point increase in the interest rate means their monthly bills will surge by hundreds of pounds.
The Resolution Foundation calculated that people looking to remortgage their homes will now pay an average £2,900 a year more from 2024 on the back of the rate hikes.
Read more: House prices cool down as rising mortgage rates keep buyers away
Meanwhile, more than 1 million households across Britain are expected to lose at least 20% of their disposable incomes thanks to the surge in mortgage costs, the Institute for Fiscal Studies (IFS) said.
The pound climbed 0.4% against the dollar (GBPUSD=X) to more than $1.28 following the decision but fell back down moments after in volatile trading as investors digest the decision.
Neil Wilson, chief market analyst, said: "Sterling shot higher but gains pared back with cable back to under 1.28 sharply...recession is not good for the pound, down on the day to 1.2760 area, touching LOD at 1.27370."
It also comes as UK inflation remained at 8.7% in the year to May despite expectations of a fall.
On Wednesday, the Office for National Statistics (ONS) said that annual inflation held steady from the same level in April, reversing two months of improvement as the soaring cost of living adds to pressure on households. City economists had forecast a figure of 8.4%.
Concerningly, there was a rise in “core inflation”, which excludes food and energy prices in order to create a less volatile picture of domestic price rises. This rate, closely watched by the BoE, rose to 7.1%, after April’s figure was already a 30-year high.
The Bank has already faced heavy criticism, including from some MPs, for failing to keep inflation around its 2% target.
In a letter in the chancellor, Bailey said that “CPI inflation remains much too high, and inflation in core goods and services have risen”
"Food price inflation, meanwhile, is projected to fall further in coming months, reflecting the waning of pass-through from previous shocks. Headline CPI inflation is expected to fall significantly further during the course of the year, in the main reflecting developments in energy prices.
"Recent levels of wholesale gas futures prices will lead to a fall in July and, if sustained, again in October in the Ofgem cap on energy prices faced by households. As a result, towards the end of the year, falls in energy prices can be expected to pull down significantly on annual CPI inflation."
Read more: UK economy returns to growth with 0.2% expansion in April
But today's hike rate was criticised by unions, including the Trade Union Congress and Unite.
TUC general secretary Paul Nowak said: “This interest rate hike is the result of dangerous groupthink in the Bank of England and Downing Street. Pushing interest rates so high that the economy is driven into recession will only make the current crisis worse, costing people their jobs and their homes.
“Inflation was caused by global energy shocks and government should be doing more to ensure households and businesses benefit as prices fall.
"Instead of scapegoating workers who are desperate for their pay to keep up with prices, ministers should focus on a credible plan for sustainable economic growth and rising living standards."
Many analysts are now also questioning whether a forced recession is on the cards.
Read more: Interest Rates: Why the Bank of England may have to create a recession
Tomasz Wieladek, who worked at the Bank from 2008 to 2015, said the BoE needs unemployment to reach at least 6% in a recession to bring inflation back down to its target.
He said the Bank would need to engineer a recession that pushed unemployment up to 6%-6.5% from its current 3.8% to achieve this now.
“Unfortunately, the Bank of England is in a situation where they will have to hike until something breaks.”
His comments were echoed by Phillip Hammond, who served as chancellor from 2016 to 2019. Hammond told LBC on Thursday: “I don’t think The Bank has got much choice [but to tip the country into recession] unless the government does something pretty significant intervening in the labour market in a different way."
Watch: How does inflation affect interest rates?
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