Many homeowners will see their yearly mortgage costs rise by approximately £600, according to a trade association, after the Bank of England’s decision to hike interest rates by 0.5 basis points to 2.25%.
UK Finance insisted borrowers whose mortgage payments directly track the base rate set by the BoE's Monetary Policy Committee will be spending an extra £49 a month.
A borrower with a standard variable rate (SVR), however, can expect to see an annual increase of around £370.
Although 78% of outstanding residential mortgages are on fixed rates, meaning the vast majority of homes will not immediately feel the impact of the BoE’s decision to raise rates to their highest level since just after the last financial crisis in November 2008.
Nearly four-fifths of UK households will likely be in for a shock when they do re-mortgage, after having been locked into their home loan.
The maximum fixed-rate mortgage can be up to 40 years but that is rare, with most being two, three, five or 10 years.
Shadow chancellor Rachel Reeves said the increase “shows how this Tory government has lost control of the economy.”
She added: “Their failure to foot any of their energy package with a windfall tax on the enormous profits of oil and gas producers is creating dangerous uncertainty.
“Their choice to put such huge unfunded and uncosted sums on borrowing will leave British taxpayers paying for years and are pushing up mortgage costs for everyone. The Tories’ reckless approach is an immense risk to family finances.”
1.12pm: 5-4 split vote
The Bank of England's monetary policy committee today raised interest rates by half a percentage point to their highest level since the 2008 financial crisis.
But the vote amongst the nine members of the MPC was by no means unanimous, with a five-four split in favour of hiking by 50 basis points (bps) from 1.75% to 2.25%.
Three committee members wanted to raise rates more hawkishly - by 0.75 bps - with new member Swati Dhingra on her own opting to vote for a more dovish 25 bps hike.
Alongside the policy change, the central bank cut its forecast for peak inflation to just under 11% in October from its previous prediction of 13.3%, which was made before the government's moves to freeze energy prices for households and businesses.
It predicted that the consumer price index (CPI) is likely to stay above 10% for a few months before falling lower.
The BoE also predicted that the UK economy may already be in recession, with gross domestic product growth between July and September now expected to shrink 0.1%, following a similar contraction in the second quarter.
Victoria Scholar, head of investment at Interactive Investor, commented: "The Central Bank’s decision was more dovish than markets expected, particularly following the Fed’s hawkish 75-basis point rise yesterday and the recent depreciation for the pound.
"The timid increase will do little to stem the slide in sterling but may avoid inadvertently inducing unnecessary pain for the economy, which is already grappling with slowing demand and deteriorating confidence.”
12.15pm: Less than expected 50 basis point rise
The Bank of England’s (BoE) Monetary Policy Committee (MPC) hiked interest rates by 0.5 basis points to 2.25% as it erred on the side of caution with a recession looming.
It was the seventh consecutive rise as the MPC tries to offset high prices and return to the BoE’s 2% target inflation level.
The decision will further squeeze the budgets of households across the UK as those on variable mortgages will see a significant uptick in paying for their homes.
"Anyone with a tracker or variable rate mortgage will see their monthly costs jump, which could mean spending hundreds of pounds more a year," Richard Ollive, Wesleyan senior financial adviser, said, before adding that fixed rate deals are increasing too with fewer offers on the market.
"Anyone on a tracker or variable mortgage may start to think about fixing to save on monthly costs," he commented.
Markets had anticipated a 0.75 basis point rise to 2.5% but most economists predicted today's raise correctly, insisting it would be the same as last month's.
The pound was moving firmly higher prior to the decision before taking a U-turn on the back of the smaller-than-expected increase.
"The BoE has big problems to deal with as a recession is firmly on the cards and this remains in focus among traders who trade the Sterling," Naeem Aslam, Avatrade chief market analyst, said.
The base rate stood at 0.1% until December last year, which was when the first rise was implemented by the Bank.
Interest rates are often raised to offset soaring inflation, which in August dipped to 9.9%, down from July's 40-year high of 10.1%.
Raising rates is designed to incentivise people to save rather than borrow and spend, which should – in theory – drag prices down.
The average forecast from analysts and economists is for rates to reach a high of 2.50%, while financial markets are pricing in a 4.5% peak.
11.21am: 75 basis point hike expected
The Monetary Policy Committee is expected to hike interest rates by the largest amount in 33 years when it gathers for this month's delayed meeting at midday on Thursday.
In August, rates were hiked by 0.5 percentage points to 1.75% in what was the biggest single increase in 27 years.
Markets anticipate a 0.75 basis point rise to 2.5% to return to the BoE's 2% target inflation level.
Some economists, however, anticipate September's raise to be the same as last month's 0.5bps hike.
August's decision was the sixth consecutive time the MPC has voted in favour of upping interest rates, with economists and investors certain of a seventh.
The BoE has forecast CPI will peak at 13% in the fourth quarter of 2022, while economists at Citigroup and Goldman Sachs (NYSE:GS) (Goldman Sachs (NYSE:GS)) have estimated inflation would eventually reach a peak of 18% or even 20%.
However, since these predictions were made, new prime minister Liz Truss has capped energy bills at £2,500 for two years, which is below the planned price cap of £3,549 at the time of the Citi and Goldman forecasts.
Because of the PM's intervention, inflation is not expected to not hit such highs.
This could help the economy avoid a long recession but is not anticipated to avert more potential interest rate rises in the coming year or two, as it is predicted to make it difficult for inflation to return to normal.
The market is still betting on a three-quarters-point hike to 2.5%, with an 82% chance, according to AJ Bell.
“According to Refinitiv, the markets are putting an 18% chance on a half-percentage-point increase to 2.25% and an 82% chance on a three-quarter-point hike to 2.50% from the Bank of England at Thursday’s meeting, but financial markets are wondering just how far the Monetary Policy Committee is prepared to go,” Russ Mould, AJ Bell investment director, commented.
Believing inflation will now continue to fall, this “will in our view remove support for a prolonged hiking cycle,” said Barclays economist Fabrice Montagne, forecasting rates will reach a peak of 2.5% in November.
Others see rates going much higher, with Nomura estimating the MPC will raise the rate to 3.75%, revising up its previous forecast of 2.5%, while NatWest Markets added a 0.5pp to its outlook – now at 3.5%.
Capital Economics said last week it thinks the BoE will hoist rates to a peak of 4.00% next year, up from its previous forecast of 3.00%.
The average forecast from analysts and economists is for rates to reach a high of 2.50%, while financial markets are pricing in a 4.5% peak.