• Base rate rises to 1.75%
• Inflation expected to rise to just over 13% in Q4 2022
• UK projected to enter recession from Q4 2022
• ‘Financial catastrophe’ for millions of mortgage borrowers
• Effect of base rate hikes on savings and loans.

Members of the Monetary Policy Committee (MPC) voted by a majority of 8-1 to increase the base rate from 1.25% to 1.75%. The minority member preferred to increase the bank rate by a smaller 0.25% to 1.5%.

Widely predicted, this is now the sixth consecutive increase from the historic low rate of 0.1% in December 2021. The Bank of England also revised its inflation prediction from 11% to 13% by Q4 2022 with the majority of that upside due to higher expected household energy prices.

It said: “Inflationary pressures in the UK and the rest of Europe have intensified significantly since the MPC’s previous meeting. That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs. As this feeds through to retail energy prices, it will exacerbate the fall in real incomes for UK households and further increase UK CPI inflation in the near term. CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.”

The MPC also noted that GDP growth in the UK is slowing and the outlook has deteriorated. As such it said the UK is now projected to enter recession from Q4 this year, while real household post-tax income is expected to fall sharply in 2022 and 2023, while consumption growth turns negative. Firms have also reported that they expect to increase their selling prices markedly, reflecting the sharp rises in their costs.

Another negative update relates to employment. The MPC said unemployment is expected to rise from 2023. It noted: “The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, at this meeting.”

Big hit to mortgage borrowers

Andrew Hagger, personal finance expert of Moneycomms, said: “The MPC decision to hike rates for the sixth time since last December will make borrowers wince at the thought of spiralling monthly mortgage costs.

“Customers currently on a fixed rate will avoid immediate financial pain, but for many a triple digit increase is inevitable next time their mortgage deal comes up for renewal.

“Increased borrowing costs in isolation would usually cause people to tighten their belts but add this to the mix of out-of-control energy prices, food costs and fuel bills, and some people are facing a financial catastrophe.”

Calculations from Moneycomms revealed an extra 0.5% rate hike will add the following amounts to variable rate mortgage customer bills which are typically updated within one month of a rate change:

• £150,000 mortgage – £37 extra a month
• £250,000 mortgage – £62 extra a month
• £400,000 mortgage – £99 extra a month.

But since rates started creeping up from December 2021, the cumulative base rate increases equal 1.65%. As such, those with variable rate mortgages have actually seen their costs rise by the following amounts compared with November 2021:

• £150,000 mortgage – £127 extra a month
• £250,000 mortgage – £212 extra a month
• £400,000 mortgage – £338 extra a month.

Alastair Douglas, CEO of TotallyMoney, added: “The latest interest rate hike will serve as yet another blow to the two million mortgage borrowers without a fixed-rate deal.

“The one in three homeowners whose fixed-rate deal is soon coming to an end should start planning ahead. Not only is the Standard Variable Rate rising, but new deals are also getting more expensive. Either way, you’re likely to be paying more, so it’s worth looking at your options in advance.”

Effect on savings and loan rates

In theory, an increase in the base rate is good news for savers, but not all providers will pass on the full 0.5% rate rise and they may not be quick to share the benefit either. As inflation soars, it also means there are no standard savings accounts that can match or beat this figure so money is losing its worth in real terms.

Rachel Springall, finance expert at Moneyfacts, said: “Loyal savers may not be benefiting from the base rate rises and they could be missing out on a better return if they fail to compare deals and switch. Interest rates are rising across the savings spectrum. However, out of the biggest high street banks, only one has passed on all five base rate rises (HSBC Online Bonus Saver), which equate to 1.15% and some have passed on just 0.09% since December 2021.

“The patience of some savers may be wearing thin, but there is no guarantee they will see any benefit from a base rate rise. Thankfully, challenger banks and building societies continue to compete in this space and the average easy access rate has risen to 0.69%, up from 0.20% in December 2021. With this in mind, there are still accounts out there that fail to beat base rate so there is still more room for improvement.”

Springall added: “Keeping abreast of the top rate tables is essential and there is little reason for savers to overlook the more unfamiliar brands if they have the same protections in place as a big high street bank. Easy access accounts remain popular, but savers must be sure to check the terms and conditions as not every deal will give them complete flexibility. In times of uncertainty, it’s wise to have quick access to funds to fall back on to cover unexpected costs.”

A higher base rate is also likely to impact interest rates on loans and credit cards, making it more expensive to borrow money or pay off debt.

However, for those with a fixed rate personal loan, there’s no change as it’s set for the term of the loan.

But, it may become harder to be accepted for a loan as banks could become stricter on affordability, particularly around a borrower’s ability to continue making higher repayments.

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investing and coaching service, said: “Higher rates also translate into more expensive loans, credit cards and overdrafts if banks pass on the increased rate, a concerning factor when it is likely more households will use credit to pay everyday expenses during the costs crunch. The jump in consumer credit borrowing to £1.8bn in June from £0.9bn in May proves just how challenging the current environment is already becoming.

“Those locked into a fixed-rate personal loan or car loan won’t have to pay more as the terms have already been agreed, but new borrowers shopping around for credit will find the cost of debt higher.

“Anyone with niggling credit card debt could consider a 0% balance transfer deal, which gives you an interest-free period to pay back the debt at your own pace without the fear of the debt compounding out of control.

“For bigger debts, such as large overdrafts or multiple maxed-out credit cards, consolidating them into a loan with one fixed payment a month should ease the stress that can come with heavy liabilities. The ultimate aim in these constrained times is to borrow as little as possible over the shortest time possible to secure the lowest rate possible.”

Bank aims to curb inflation

Today’s rate rise comes as the Bank aims to curb soaring inflation which came in at 9.4% in June, amid the backdrop of an economic slowdown, the cost-of-living crisis, and the global effects of the Russia Ukraine war.

Base rate rises are one of the mechanisms the Bank of England uses to try and keep inflation under control as higher borrowing costs generally mean people spend less.

But as the cost of living soars and inflation rises, workers are striking for higher pay to compensate, which could ultimately lead to a wage inflation spiral.

The MPC previously forecast inflation to breach 10% by the year end, but it revised this figure to “slightly above 11% in October”, reflecting the higher energy price cap set by Ofgem.

According to leading energy consultancy, Cornwall Insight, the energy price cap for Q4 2022 is now forecast to reach £3,359. Meanwhile, the Bank of England predicts inflation will now rise to 13% by Q4 2022 and remain at elevated levels throughout much of 2023.

The bank rate was last higher in December 2008 where it stood at 2%, before falling to 1.5% in January 2009. And the last time the Bank increased the rate by a larger 0.5% came 27 years ago when it was hiked from 6.13% in December 1994 to 6.63% in February 1995. The last time there were six consecutive base rate increases was in November 1997.