The Bank of England (BOE) has taken the market by surprise by raising its benchmark interest rate by a half percent to 5%. This hike is the biggest move seen since February and has been taken to combat the worst bout of inflation since the 1980s. The Monetary Policy Committee voted 7-2 for the rise, while 40% of markets were pricing a half-point hike and most economists had predicted a quarter-point rise. The central bank explained that it may have to raise the rate again if inflation continues.
The UK is the only G7 member being hit by high inflation, with consumer prices reaching 8.7% in May compared with the BOE’s target of 2%. Despite the US Federal Reserve pausing its tightening spree, the decision indicates that UK borrowing costs could rise during the summer. As consumers continue to face obstacles, experts are warning of a mortgage “time bomb” as households refinance at unaffordable rates.
At least 800,000 fixed-rate mortgages are due for renewal in the second half of the year, which has led politicians to blame the BOE for failing to halt inflation earlier, and to call on Prime Minister Rishi Sunak’s government to help struggling borrowers. However, the government has so far resisted calls, with fears that it could undermine the BOE. The issue has already been added to the political agenda ahead of next year’s election.
If rates reach market forecasts of 6%, the UK could collapse into recession. As a result, the BOE is planning for higher rates, with many expecting rates to peak at around 6% by early next year. This would be the highest in more than two decades. Bailey warned that many people with mortgages or loans will be understandably worried about what this means for them, but explained that rates had to be raised now to prevent further issues.
The minutes from June’s meeting revealed that both service inflation and core inflation have been stronger than anticipated. Wages have also been rising faster than expected, warning of “more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand.” BOE officials are expected to draw up new inflation and growth forecasts before their next decision is due in August.