The Bank of England has raised the interest rate by a quarter of a percentage point to 4.25% for the 11th consecutive time following an unexpected jump in inflation last month
Yesterday (23 March 2023), the Bank of England announced a further interest rate rise to 4.25% after a meeting held by the Monetary Policy Committee (MPC). Two members of the MPC voted to maintain the interest rate at 4%.
What is the cause of the latest interest rise?
The interest rate rise comes as a response to unexpected inflation in the month of February to 10.4%, from 10.1% in January. The report released by the Bank of England suggests that this rise was due to food and core goods price inflation which was significantly stronger than projected. The current inflation target is 2%.
‘UK banking system remains resilient’
In anticipation of the next quarter’s increase at the MPC’s next meeting in May, the pound has risen against the dollar as global markets prepare themselves.
Despite this, the Bank of England’s Financial Policy Committee (FPC) has stated that the UK banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy during a period of higher interest rates.
Following the additional support announced in the Spring Budget, bank staff have provisionally estimated that this could increase GDP by around 0.3% over the coming years.
Household disposable income is expected to remain flat
GDP is expected to increase slightly in the second quarter, compared with the 0.4% decline anticipated in the February Report.
As the Government’s Energy Price Guarantee (EPG) will be maintained at £2,500 for three months from April, real household disposable income could remain broadly flat in the near term, rather than falling significantly.
‘Marathon of measures’ is expected to have a long-term effect of calming the markets
Nick Leeming, chairman of Jackson-Stops, commented: “Hot off the heels from a surprise rise in inflation for February, the latest decisive action in a marathon of measures by the Bank of England to bring inflation down by the end of the year should have the long-term effect of calming the markets. This could, however, be a fly in the ointment for housing, as mortgage borrowers watch intently to understand the effect this may have on current deals.
“In the medium term, as with an ever-evolving economic picture, if inflation is successfully scaled back, the overall lending market may paint a more favourable picture for borrowers with further stability on the horizon.
“Home ownership continues to sit at the top of the table for savers looking to beat inflation and make their money work harder for them. No cash savings rates currently available can beat inflation.
“By comparison from January 2022 to January 2023, the average UK house price rose by £17,000*, showing just how reliable longer term capital growth in our bricks and mortar can be. Even with the average monthly mortgage payment being £733, homeowners could have made an average profit of £8,156.”
‘Interest rates will continue to rise before they fall’
Head of Corporate Partnerships at Sirius Property Finance, Kimberley Gates, said: “An eleventh consecutive interest rate hike will come as a blow to the nation’s homebuyers who will now see the cost of securing a mortgage climb that little bit higher at a time when they are already struggling with the wider cost of living.
“The silver lining is that today’s increase is the lowest since August of last year which suggests we could be over the hump. However, we expect that interest rates will continue to rise before they fall, with the general consensus being that they will peak at five percent.”
