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Bank of England raises interest rates to 1.0%

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The rate hike was widely anticipated: a member of the monetary policy committee, Catherine L Mann, said – during a Bank of England webinar in late April – “monetary policy must keep inflation expectations anchored; by doing it now, less tightening will be needed later, when demand may still be weak.”

The decision was not unanimous – 6 members voted for the increase to 1.0%, while 3 members voted for a higher increase to 1.25%.

The Committee cited rising goods and energy prices, the Russian invasion of Ukraine affecting prices and Covid as influences on rising inflation – in March prices rose 7% per compared to the previous year, well above the Bank of England’s target of 2.0%.

The committee said it also intended to review the process for the sale of UK government bonds, although it said any sale would be made on the basis of economic circumstances and in a phased manner, with a further update on its proposed strategy to be given at the August meeting. minutes.

The report continued:

“The Bank of England can’t do anything about the global supply issues or the energy prices that are currently driving up inflation.”

“But we have tools to make sure inflation gets back to our 2% target. The main tool we use to bring inflation down is to raise interest rates.”

“We raised the UK’s top interest rate (bank rate) from 0.1% to 0.25% in December 2021, to 0.5% in February 2022 and then back to 0 .75% in March.”

“This month we raised the bank rate to 1%. We expect inflation to come down next year and be close to our target in about two years. We may need to increase further interest rates in the coming months. But it all depends on what is happening in the economy. In particular, we will be watching closely what is likely to happen to the inflation rate over the next couple of years.

The financial sector was quick to react to the news. Here is what they say:

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Loyal savers who have an easy-access account with one of the biggest high street brands see little benefit from base rate hikes, as many of these brands only passed on 0, 09% since December 2021 and none have passed through the three base rate increases, which equates to 0.65% The average easy access rate has increased by 0.20% since the beginning of November 2021 , so there’s still room for improvement across the industry, but as rates go up, it’s a good idea to compare offers and switch.

“As we have seen previously, it may take a few months for customers to see any benefit from a base rate hike, but there is no guarantee that savings providers will increase their If savers are passed on 0.25%, that would mean receiving an extra £50 a year in interest based on a £20,000 investment.

“The best rate tables for easy access accounts are experiencing some competition from challenger banks, which is great news for savers who prefer to keep their money close at hand. There is no certainty that a deal at the best rate will last very long, but consumers can easily switch between accounts if they wish. If savers are using barrier-free accounts as a safety net, they should check that they will not be penalized for withdrawals and ensure that they are still offering a competitive return. Overall, it is positive that savings rates are rising and hopefully will continue to do so in the coming weeks. »

Steve Seal, CEO, Bluestone Mortgages comments: “Despite continued inflationary pressures, today’s decision will be a blow to consumers and borrowers across the country, many of whom have already felt the pressure on their personal finances. This rise in rates will undoubtedly put additional pressure on these people.

“However, potential and existing borrowers must remember that hope is not lost, and this is where the value of advice is paramount. homeownership and the solutions available to meet their needs. Whether it’s locking in a fixed rate mortgage, remortgaging or directing consumers to a lender who can meet their situation, these professionals are here to help people realize their dreams of home ownership.

Vikki Jefferies, Director of Proposals, PRIMIS, comments: “The Bank of England has decided to raise the key rate again to its highest level in 13 years, as it seeks to combat record inflation. It will come as no surprise that this decision has been taken, the consumer price inflation reaching a 30-year high of 7% in March, and households continuing to struggle with rising energy bills alongside broader increases in the price of goods and services.

“The continued rise in interest rates poses major questions for the millions of homeowners who have been buying at low rates in recent years – especially those with a two-year solution, who could face a shock in the months ahead. Brokers will now need to be more proactive than ever to ensure the best results for their clients. This is particularly the case for those with complex financial situations, and brokers must act quickly to help these clients find the most suitable products. and the most affordable ones that match their current situation.

Sarah Pennells, Consumer Credit Specialist at Royal London, says: “Interest rates rose for the fourth time in six months, with the latest hike taking the base rate to its highest level since 2009, rising a quarter of a point from 0.75% to 1.00 %.

“Interest rates rose in December for the first time since 2018 and the Bank of England hasn’t stopped breathing since, with four successive hikes signaling the end of a prolonged period of ultra-low rates.

“Savers are suffering a double whammy. Those who can leave their savings intact will still lose money in real terms, despite today’s rate hike, because the return on cash held in savings is significantly lower than the current high level of inflation. Rising costs of living outpacing wage increases are also forcing others to dip into their savings, with a quarter (24%) of full-time workers in the UK seeking access to some or all of their savings short term. to help them get by on a daily basis.

“A drop in disposable income also means that we are spending more and saving less. As costs continue to rise, this reverses the situation created during the pandemic where millions of people have become “accidental savers” to a situation where inflation forces us to become “accidental spenders”.

“Alongside interest rates, steep rises in household bills and the general cost of living are a huge concern for 95% of adults in the UK, leaving many wondering how they will make ends meet. Worryingly, a fifth (21%) of people are considering borrowing to get out of trouble, at a time when the cost of borrowing is rising.

“Adjustable rate mortgage borrowers barely had time to deal with the effects of the last rate hike and are now facing another hike. Every quarter per cent increase in mortgage rates costs someone with a £200,000 repayment mortgage over 25 years an additional £27 a month. While some owners will be able to afford it, others will undoubtedly struggle, especially as other costs skyrocket.

David Johnson, Managing Director of Independent Property Consultants INHOUS, says: “In the traditional housing market, there’s no doubt that the latest in this series of interest rate hikes will have an impact on homeowners. Many people we talk to believe a recession is inevitable.

“In London, interest rate hikes will impact buyers who have bought in the last five or six years and paid a premium to do so. Between the price range of £2m to £8m , the market was very competitive with the majority of buyers needing financing and paying high prices to secure their homes.We could see these owners struggle at a later stage if there are several more interest rate hikes. , but it won’t happen any time soon. It also depends on the financing they have in place, if if they have a fixed rate mortgage in the medium or long term, they may be ok, but s opted for a variable rate, it could be a nervous time for them.

“When it comes to high net worth and ultra high net worth buyers, we don’t expect to see much of an impact. The majority of our clients are cash buyers or have cash reserves, but choose to take the rate hikes interest are not even a topic of discussion for these buyers.With buyers still outnumbering sellers in London, property values ​​should remain strong.

Mark Harris, managing director of mortgage brokerage SPF Private Clients, says: “With markets already pricing in this rate hike, this is not surprising. Lenders have been raising mortgage rates in recent weeks with little to no notice, making it difficult for borrowers as any hesitation can mean missing out on the best deals.

“The Bank of England must carefully balance the need to control inflation with the wider economic challenges posed by rising interest rates. Even with this latest hike, we remain in a cycle of low interest rates and we expect this to be the case indefinitely.

“For every £100,000 on a variable rate mortgage, a quarter point rise in the rate adds £250 a year. Borrowers who have variable rate agreements can consider taking out a fixed rate mortgage – as these become more expensive, some of the longer term solutions are priced particularly competitively. However, borrowers should do be careful not to fix longer than they think, otherwise they could incur high prepayment charges to get out of the mortgage sooner.

“The buying market is still active although the housing market has calmed down a bit and the scum has disappeared. Activity in the mortgage market is brisk, with some borrowers considering paying the penalty to exit their contract existing sooner in order to get another product before pricing. It may be worth it, but it’s important to make sure that any savings you make on your mortgage payments outweigh the costs involved. can be reserved up to six months before they are required and we are getting a lot of interest from motivated borrowers by doing this.”