Remember the halcyon days of November 2021 when the bank rate was just 0.1%?
The rate is now 1.25%, which seems sure to push up the cost of mortgages.
“Mortgage borrowers on a variable or tracker rate will be hit the hardest as their monthly costs will rise, and this could be a significant increase. Every quarter per cent rise in mortgage rates costs someone with a £200,000 25-year repayment mortgage an extra £27 a month,” said Sarah Pennells, a consumer finance specialist at Royal London.
“While some homeowners will be able to afford that, others will undoubtedly struggle, especially as other costs spiral,” she added.
As expected, #MPC edged interest rates up again but they’re not sending a decisive warning shot to signal they will do what it takes to bring down inflation. They’re too concerned to fine-tune the path of GDP and not concerned enough about the dangers of double digit price rises.
— Andrew Sentance (@asentance) June 16, 2022
Laith Khalaf, the head of investment analysis at AJ Bell, said some might accuse the Bank of England of bottling the interest rate decision by not following the US Federal Reserve’s move yesterday and going for a bigger rise.
“The Bank of England is playing a game of slowly, slowly catchy inflation, rather than the shock and awe tactics being employed across the Atlantic. Despite the UK starting to tighten monetary policy first, interest rates are now higher in the US. Markets will no doubt seize on this as a sign the Bank of England has bottled it, but an incremental strategy allows the rate-setting committee to observe more data as it comes in, and fine-tune its approach as circumstances dictate. The US economy also has more long-term fixed mortgages than the UK, which makes interest rates across the pond a blunter policy tool, so the Fed has to create a bit of extra bang to have the same effect on a buck,” Khalaf said.
“No-one should labour under the misapprehension that interest rate rises are going to do anything about eye-watering levels of inflation in the short term. Our inflationary problem is being driven by a supply shock to energy markets stemming from the conflict in Ukraine, and the ensuing sanctions, and no number of interest rate rises will solve that problem. What the Bank is trying to do is head off second order inflationary effects becoming ingrained in the system and taking on a life of their own,” he added.
With the Bank doing exactly as expected there was little to no reaction from the FTSE 100, which remains deep in the red at 7,095, down 179 points (2.5%).
12.10pm: Quarter-point rise good news for savers
Martin Lawrence, the director of Investments at Wesleyan, the specialist financial services mutual, was quick off the mark with his commentary and was probably thankful the Bank didd as expected and raised its key lending rate to 1.25%.
“Faced with runaway inflation, the Bank of England was under immense pressure to act urgently, so today’s announcement is no real surprise. We expect further interest rate rises tipping towards three per cent in the months ahead; however, the MPC’s hands are partially tied in that they can’t raise rates too high or too quickly, or else risk smothering the UK economy.
“Higher interest rates can be good news for those with cash savings, but only when providers pass on the base rate to their customers. For those who are fortunate enough to have money in savings, they should be considering all options to maximise their financial returns, such as investing in Stocks & Shares ISAs and other products that look past short-term volatility with the aim of long-term gains,” he said.
The Bank of England base rate has risen for the 5th time since December and now stands at 1.25%, after todays rate, It’s highest level since 2009. https://t.co/unFQP8xrKt #InterestRate #inflation
— Independent Adviser (@BlackthornFs) June 16, 2022
12.02pm: Bank of England sticks to the script
As expected, the Bank of England's policy-making committee has announced a quarter-point rise in its key lending rate to 1.25%. The committee voted for the change by six votes to three.
MORE: Monetary Policy Committee voted by a majority of 6-3 to raise interest rates to 1.25%
— BNN ???????? Newsroom (@BNNUK) June 16, 2022
The consensus forecast is that the Bank of England will bump up its key lending rate to 1.25% from 1.0% at midday, although some pundits are speculating that it will go a bit further.
That would be out of character for the Monetary Policy Committee (MPC), however, which tends to limit changes to a quarter of a point (unless Norman Lamont is the chancellor of the exchequer).
“Another 25bps is fully anticipated – anything more has seemed unlikely since the MPC is extremely worried about tightening leading to recession but ...with the bold move by the Fed, there is probably a higher chance we see 50bps – three voted for it last time and a fourth might be enough if the remaining five are split between 25bps and doing nothing. I would not be surprised if the BoE voted for 50bps,” said Neil Wilson at markets.com.
10.45am: A quarter-point rise is expected
The Bank of England's Monetary Policy Committee (MPC) will announce its interest rate decision later today. Coverage of the announcement and reaction to it will be on this channel.
The decision comes a day after the US Federal Reserve announced a rate hike of three-quarters of a percentage point - referred to as 75 basis points (BPs) in traders' jargon - and a half-point increase by the Swiss National Bank today.
"With the Fed going for an aggressive hike, we could well see further losses for the GBP/USD in the event the BoE does not appear very hawkish. The MPC’s decision is not an easy one. It must balance the risk of keeping inflation persistently high by not being too aggressive against an uncertain growth backdrop," said Fawad Razaqzada, a market analyst at City Index and FOREX.com.
"Inflation accelerated to 7.8% in the 12 months to April 2022, up from 6.2% in March. The UK jobs market is also strong enough to warrant a rate increase. The fact that the UK government provided £15bn extra government stimulus is also a reason to continue with the hikes, even if the economic outlook looks grim. We are likely to see hikes in June, August and September, but questions remain as to whether the BoE will up the pace of the hikes. A lot will depend on inflation and right now it doesn’t look like it is going down any time soon.
"What’s worrying though is that several macro pointers have disappointed expectations and with inflation eating into consumers’ disposable incomes, a recession might not be unavoidable despite the government’s support. Indeed, consumer confidence remains very low, while the latest PMIs suggest a sharp slowdown in business activity is coming," he added.
Martin Beck, the chief economic advisor to the EY ITEM Club, concurs that the MPC finds itself batting on a sticky wicket.
“The economy is experiencing rising, supply-driven inflation at the same time that demand is weakening, leaving the MPC in a challenging place in advance of its interest rate decision this month. CPI inflation rose to 9% in April, the highest since March 1982, if a little below the MPC’s expectation. On top of inflation rising even further above the 2% target, the MPC's concerns about pressure on wages and prices from a tight jobs market won't have been allayed by a fall in the unemployment rate to just 3.7% in Q1, the lowest since the early summer of 1974, and job vacancies setting another record high but while the MPC isn’t short of reasons to raise rates, it will also be mindful of the risks of tightening policy at a time when some growth indicators have started to flash red. For example, GDP fell in both March and April, while consumer confidence fell significantly in April," Beck said.
“The committee increased rates in May, despite forecasting two quarters of negative growth over the next year, which suggests it may not be swayed much by evidence of the economy carrying less momentum. On balance, the EY ITEM Club thinks a majority will put inflation concerns above growth concerns and vote for a 25bps rise in Bank Rate, although the consensus is likely to prefer a more gradual approach to tightening and continue to push back against bullish market rate expectations.
“Investors are still pricing in further rate rises at every meeting this year, taking Bank Rate to 2.25% by the end of 2022 but the MPC's May forecast showed inflation falling well below the 2% target by 2024 were rates to follow such a path and uncertainty surrounding the outlook, particularly around how ‘sticky’ high inflation will prove, and whether people who became inactive during the pandemic will return to the workforce, should encourage a cautious approach," he added.
The big question, according to Marshall Gittler at BDSweiss, is what the vote will be.
"Last time three of the nine members of the Monetary Policy Committee (MPC) voted for a 50 bps hike. Will they vote for it again? Will anyone else join them? On the other hand, with growth slowing, will anyone vote for no change? The MPC could be sharply divided," he speculated.
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