finance
monthly
Personal Finance. Money. Investing.
Contribute
Newsletter
Corporate

They’ve gone up from 3% to 3.5%. This is the ninth time in a row they’ve been hiked.

This increase will result in higher mortgage payments for property owners and people who’ve taken out loans. It comes at a time when everyone across the country is faced with the cost-of-living crisis – right before the Christmas holidays.

Inflation is currently sitting at 10.7% in the country – or over 5 times higher than the 2% target. However, it has slightly eased since November.

Andrew Bailey, Bank of England Governor, said it was the "first glimmer" that soaring price rises were starting to come down but there was still "a long way to go".

Despite previous predictions that the economy might grow between July and September, the central bank now estimates that it will shrink by 0.1%.

This is the Bank’s seventh in a row interest rate increase as it attempts to tackle soaring prices.

The Bank of England said today: "Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the [rate-setting] committee will respond forcefully, as necessary."

Paul Dales, chief UK economist at Capital Economics, commented: "That new 'stronger demand' bit seems like a not-so-subtle reference to the loosening in fiscal policy that's expected to be announced tomorrow.

"In short, the Bank has indicated it will raise rates further to offset some of the boost to demand from the government's fiscal plans."

The 50 basis points increase to 1.75% will be the largest interest rate in 27 years and will speed up a historic tightening of monetary policy to tackle the highest level of inflation experienced in four decades. 

In June, inflation reached 9.4%, with the BoE predicting it will rise again to 11% before the year ends. 

In a comment, BoE governor Andrew Bailey said, “The Committee will be particularly alert to indications of more persistent inflationary pressures, and will, if necessary, act forcefully in response. Bringing inflation back down to the 2% target sustainably is our job, no ifs or buts.”

The BoE has already raised interest rates on five occasions in the past seven months a record amount that is putting substantial pressure on people who have borrowed funds.

[ymal]

The pound was down as much as 0.5% against the dollar to $1.2290 after it reached a one-week high of $1.2405 just a day earlier. 

The dollar index was up 0.23%, with the dollar gaining against the Japanese yen after the Bank of Japan chose to keep its monetary policy unchanged. Meanwhile, against the euro, the pound sterling traded flat at 85.46 pence.

On Thursday, the pound had gained 1.4% against the dollar thanks to the Bank of England’s 0.25% interest rate increase. The rise caught some investors by surprise. Many had expected a more aggressive move by the UK’s central bank amid soaring inflation in the country. 

[ymal]

What is the Bank of England interest rate rise?

In the fourth increase since the start of December 2021, when the base rate was 0.1%, the Bank of England has raised interest rates to their highest level in 13 years. The base rate is now 1% - a 0.25% increase. This increase is in response to inflation with the Bank of England trying to regulate the economy.

What happened the last time the Bank base rate was 1%?

The last time the Bank base rate was 1% was back in 2009 when it was cut from 1.5% to 1% during the so-called “credit crunch”. The next month it was reduced to 0.5% and remained stable until August 2016. At that point, it was cut again in order to offset Brexit’s impact on the UK economy. Since then, UK borrowers have benefited from relatively low interest rates.

What will happen to mortgage payments?

Your mortgage payments will increase but only if you have a variable rate mortgage. This could be a tracker mortgage (one which follows a base rate) or a standard variable rate (one in which the interest rate is defined by the lender).

The amount that your mortgage payment will increase will depend on the type of loan. For example, a tracker mortgage will directly follow the new base rate set by the Bank of England. Reading the small print of your mortgage, you can find out how quickly the increase will be actioned. However, it is likely that by next month your payments are already likely to go up. For example, on a tracker mortgage with a current rate of 2.25%, the new rate would be 2.5%; this equates to an additional £18 per month over the next 20 years for a mortgage of £150,000.

Interestingly but also concerning is the increase in searches online for short-term loans. For example, searches of ‘payday loans near me’ and other search terms relating to high-cost-short-term finance have seen increases in the last few months and with increased costs of living, coupled with rising interest rates, this trend is expected to continue.

What does the interest rate rise mean for those on a standard variable loan?

Data shows that there are currently 1,092,000 borrowers on a standard variable rate mortgage in the UK. This means that over 1 million borrowers in the UK are subject to the interest rate set by the bank or building society. Depending on the type of variable-rate mortgage that they have, the interest rate will either increase automatically as a direct link to the base rate or at the lender’s discretion.

It is estimated that those on a variable-rate mortgage will pay approximately £504 more per year as a result of the increase (figures from UK Finance based on a £200,000 loan). This is the equivalent of approximately £42 per month more in monthly repayments. 

The average standard variable rate charged by mortgage lenders is currently around 4.71% - only up 0.31% since December 2021 despite the jump in the base rate. This is because not all lenders have chosen to increase their interest rates in line with the new base rate.

Those on a tracker mortgage, with an interest rate directly linked to the base rate, are set to experience an increase of around £25.22 per month in their repayments. According to data from UK Finance, this jump will affect around 841,000 UK borrowers.

Will those with a fixed-rate mortgage be affected?

Those who have a fixed-rate mortgage, which is 75% of UK borrowers, will not be impacted by the increase in the base rate. However, they may face higher borrowing costs once their deal comes to its end and they may need to remortgage.

The cost of living squeeze

With the cost of living crisis still gripping much of Europe and the USA as well as further afield, rising interest rates are likely to add to the squeeze being felt by consumers. Although there are a few savings to be made, for example, the reduced need to purchase covid tests when travelling between countries, this has been more than offset by increases in fuel, living costs and interest rates.

[ymal]

"If you want to invest in these assets, okay, but be prepared to lose all your money,"  Bailey said to the public accounts committee (PAC) on Monday.

"People may still want to buy them because they have extrinsic value [...] people value things for personal reasons. But they don't have intrinsic value."

"This morning we have seen another blow-up in a crypto exchange," Bailey went on to say.

Bailey’s warning comes as Bitcoin and other cryptocurrencies continue to fall in price after crypto exchange Binance paused all withdrawals, citing “extreme market conditions.”

Bailey also told MPs on the PAC that artificial intelligence tools could potentially be used to create automatic control on cryptocurrencies that are deemed to be suspicious. 

Bitcoin hit an 18-month low, falling as much as 17% in under 24 hours to £18,540. The world’s biggest cryptocurrency is now down more than 49% this year. 

[ymal]

The Bank of England is tasked with creating inflation every year. Inflation erodes the value of money – prices rise – and our wages don’t always keep up with the cost of living. So who benefits from this policy and who pays? We know who pays for inflation.  It’s the young people saving for a deposit who have those savings eroded, while first home prices are pushed further out of reach. House prices in the UK have benefited from dramatic inflation over the past fifty years and this has meant more and more people are left behind. What’s more, rents are going up and, right now, household bills are going ballistic.  Inflation drives the abject misery of ‘heating or eating’. 

Who benefits from rising inflation?

Governments tend to favour inflation as it erodes the real cost of repaying government debt; the warfare and welfare won’t cost quite so much to pay for if we inflate the debt away. Inflation can work as a stealth tax, by freezing a tax band so that more people must pay at that rate of tax. It can also be a stealthy way of reducing current expenditure; nurses get a rise, but not by quite as much as the real inflation rate. 

Those of us who own houses and other assets quietly know that we are at least protected from inflation.  In fact, our house prices always seem to go up by more than the official rate of inflation.  The property guys see their rents increasing, with the value of their buildings increasing too and the real value of what they owe the bank falling. Property is a good gig.  Inflation works for the banks as well.  They can lend more against rising property values and are protected should they ever need to rely on the value of their security.  Banking is a good gig too. Is there an inherent problem that the Bank of England should preside over a policy that seems to suit its industry?  

Inflation is the ultimate regressive tax

Inflation takes money from poorer people and transfers it to those with wealth, as well as to the government.  It enables governments to behave irresponsibly in relation to running up debts.  In enacting this policy and indeed in letting inflation get completely out of hand, the Bank of England is behaving as a latter-day Sheriff of Nottingham.

Moreover, the Bank of England is uniquely well placed amongst central banks to start getting a grip on inflation.  Through quantitative easing and suppressing interest rates, the bank has helped keep the Sterling at its lowest sustained value since the founding of the bank.  In such a free trading country as the UK – where we import much of the products we use – an improvement in our exchange rate against other major currencies would have the immediate impact of reducing inflation. 

The fact that the Bank has operated such a loose monetary policy in a period when the UK economy has been growing reasonably well and has record levels of employment is extraordinary.

It is almost as if the bank is trying to wilfully exceed its inflationary remit.

We are so used to inflation in our lives that it is easy to forget that it has not always been like this.  In the 100 years between the battle of Waterloo and the outbreak of WW1 the pound gained about 5% in value.  This marginal deflation is perhaps not surprising given the extraordinary advancement in technology and spread in trade that enabled many items in the shopping basket to become cheaper.  As always, for most people, the largest item in that basket was the rent or purchase of their home. The Victorians managed to reduce the cost of an average home from 14 times the average household income at the beginning of the 19th Century to three times by the end.

By contrast, in the 100+ years since the outbreak of WW1 - rather than gaining in value - the pound lost over 95% of its value.  Where a pound would buy 20 loaves of bread in 1914, it now doesn’t buy one.  Average house prices are back at nearly 10 times average household incomes.  The Victorians would have been proud of our amazing technological innovation and increase in trade.  They would have been horrified at how we have allowed much of the social benefit of economic success to be eaten away by inflation.  That inflation is a government policy is shameful. That inflationary policy has been allowed to get completely out of hand is criminal. 

Inflation got going in the West as a by-product of paying for the two world wars and later for the Vietnam war.  It became a policy of governments as it suits their desire for us to live beyond our means.  It simultaneously suited financiers and property people too.  A strange marriage of the state and capital that normally appear to be opposites in our society.

Final thoughts

I am not so sure the Bank of England shouldn’t be tasked with a policy of deflation.  House prices would become more affordable for Millennials and Gen Z. This could help reverse a long-running decline in homeownership.  Rents might fall.  A policy to undo some inflation would be novel.  Who would benefit and who would pay?

About the author: Sebastian Chambers is the author of The A-Z of Inequality, published by White Fox, priced at £10.00 and available at Amazon.co.uk.

Speaking to CNBC, Harris, the founder of Cribstone Strategic Macro, said that a major issue for the UK economy is that its mortgage market is “heavily short-term”. He pointed to the contrast between much of Europe and the US, where many people opt for long-tenure mortgages instead of short-term loans of less than five years. Tracker mortgages, which fluctuate with the Bank of England’s base rate, are also popular in the UK.  

Harris said that the problem with this is that rate rises would immediately trigger losses to household incomes, though may not actually address rising inflation. Harris said that the UK “imports inflation” and that the effect of interest rate hikes by the country’s central bank isn’t simply a rebalancing of supply and demand. 

Last Thursday saw the Bank of England increase interest rates by a quarter of a percentage point to 1% the highest interest rates have been in 13 years.

“Here. we’re actually not really dealing with a pure situation where we’re trying to slow the economy, we are ultimately trying to rebalance expectations, and the U.K. is a country that imports inflation ... So we’re not effectively in a position where we’re free effectively to just focus on supply and demand,” Harris told CNBC.

“We get stuck in a situation where global inflation is driving our inflation at this stage, we have to hit the consumer and instead of just reducing the propensity to spend in the future, we’re actually taking further money out of household income, which doesn’t happen in the US.”

The Bank of England’s policymakers are expected to increase interest rates from 0.75% to 1% a level not seen since 2009. The central bank will also increase its forecasts for inflation as the cost of living crisis continues to spiral amid the ongoing Russia-Ukraine conflict. 

At its past three meetings, the Monetary Policy Committee (MPC) already upped rates in a bid to rein in inflation, which reached a 30-year high of 7% in March

The cost of living crisis is predicted to worsen again later this year when the energy price cap will be further revised. There are warnings that inflation could hit 9%, or even double digits, in the autumn. 

In March, the Bank of England said, ‘If sustained, the latest rise in energy futures prices means that Ofgem’s utility price caps could again be substantially higher when they are reset in October 2022. This could temporarily push CPI inflation around the end of this year above the level projected for April, which was previously expected to be the peak.”

While attending the World Bank and IMF spring meetings in Washington on Thursday, Bailey said the BoE is striking a difficult balance between combating inflation and tackling the threat of recession. He also voiced concerns over increasing wages keeping inflation higher for longer.  

"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," Bailey said at the Peterson Institute for International Economics.

While officials have begun to tone down their language on the need for further rate hikes, Bailey did point to another rise next month. The BoE has already increased interest rates on three occasions since December. Some traders believe the bank is looking to adjust rates from their current 0.75% level to 2.5% by this time next year. 

In March, consumer price inflation hit a record 7%, over three times higher than the BoE’s target of 2%. 

The economy’s 7.5% expansion was the largest since 1941 and made the UK the quickest-growing advanced economy in 2021. In December, gross domestic product fell 0.2%, with the spread of the Omicron variant of coronavirus encouraging more people to stay at home. 

These recent figures are encouraging amid the cost of the living crisis, likely keeping the Bank of England focused on efforts to restrain rocketing inflation with an interest-rate hike looming in the near future. 

After being hit hard by a pandemic recession, the UK has enjoyed a strong recovery, accelerated by billions of pounds of government support for jobs and companies. At present, the country’s economy is set to outperform other Group of Seven nations yet again this year. 

However, despite the positive sign that these recent figures reflect, the UK is yet to return to its pre-pandemic levels of quarterly output. This is a milestone already reached by both France and the United States.

Speaking to the BBC, Bank of England Governor Andrew Bailey said he does not expect the cost of living crisis to ease until next year.

“It is going to be a difficult period ahead, I readily admit, because we are already seeing, and we're going to see, a reduction in real income,” Bailey told the BBC. 

We're going to start coming out of it in 2023, and two years from now, we expect inflation back to a more stable position. 

“Inflation, the rate at which prices are rising, is expected to peak at 7.25% in April, more than three times its target of 2%, and average close to 6% in 2022. 

“This is a world of external prices rising, reducing people's real incomes,” Bailey added.

Bailey also suggested that workers should not ask for big pay rises to cope with the rising cost of living. However, this comment has come up against a wave of criticism, with the TUC calling Bailey's advice on pay restraint “ill-founded.”

About Finance Monthly

Universal Media logo
Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
© 2024 Finance Monthly - All Rights Reserved.
News Illustration

Get our free monthly FM email

Subscribe to Finance Monthly and Get the Latest Finance News, Opinion and Insight Direct to you every month.
chevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram