The Bank of England took tne expected step in its bid to counter persistent inflation, but with an unexpected half-point rise in interest rates.
The new figure of 6 per cent represents the highest level since 2008 and the 14 consecutive rise since the current financial crisis began.
In doing so, the Monetary Policy Committee defied earlier predictions of a quarter per cent rise, one justified by governor Andrew Bailey who told the Chancellor: “Bringing inflation down is our absolute priority.”
One person not surprised by the news was Jean Murphy, CEO of Recognise Bank, who said he base rate rise was “not totally unexpected and unfortunately places increased burden on variable rate borrowers adjusting to broader cost of living pressures. It also however should see savings rates adjust upwards too. Rising prices are damaging to everyone though so hopefully this represents another step towards a decrease in inflation.”
George Lagarias, Chief Economist at Mazars said: “A double rate hike was appropriate following yesterday’s bad inflation number. The wage-price spiral won’t break itself. The central bank’s move is a step towards the right direction.
A further 0.5% is a tough pill to swallow and the Government must offer meaningful support to homeowners and businesses to help them through this painful time
“Unfortunately, from where we are today, there aren’t many good options. The UK is in a vicious inflation cycle plain and simple. Unless demand is decisively curtailed, there’s a real danger that inflation will get out of hand. Make no mistake, this means significant pain for consumers. The government could step up to alleviate pressures in the labour market and increase housing availability, which should help diffuse the inflation bomb faster. Presently, markets are discounting four more rate hikes, a one percent higher rate by the end of the year.”
Joseph Calnan, Corporate FX Dealing Manager at Moneycorp, predicted that SMEs “relying on overseas income are likely to struggle. The pound has been gaining strength on the expectation of a further hike today, making UK products & services more expensive to international clients, and this larger rate hike should certainly accelerate that trend.
Business leaders will need to double down on fiscal prudence. It is not as simple as tightening their belts; those looking to borrow are finding it increasingly expensive; and cash flow is already being pinched by high costs and wage inflation
“A further 0.5% is a tough pill to swallow and the Government must offer meaningful support to homeowners and businesses to help them through this painful time.”
Jatin Ondhia, CEO of Shojin, said: “Rate-setters have delivered yet another blow today in their relentless battle against inflation, which continues to overpower the Bank of England’s fiscal policy. With forecasts signalling that further hikes could be on their way, the Bank’s ‘do what it takes’ approach – which has the backing of the Chancellor – will ring alarm bells for many.
“Higher borrowing costs will continue to squeeze homeowners and property investors, which in turn will lead to more buy-to-let investors exiting the market and increase rental costs due to a dwindling supply of property. The impact of this will be felt far and wide. Renters in high-demand areas like London are already spending 40%-50% of their salary on rent. We can only hope that inflation starts to settle soon, but I expect more pain before relief comes.
We know many small firms are already taking the opportunity to adapt their business models to counteract rising rates, but it’s vital they don’t put future investment decisions on hold
“Many organisations will feel ringfenced by these fiscal challenges which are placing them in the most precarious situation yet. Financial accuracy is paramount to help leaders manage capital structure and cash flow, and to retain competitive advantage. Yet too many organisations are failing to innovate their processes to accommodate the swift, accurate measures needed to stabilise business in this turbulent economic climate.”
Michael McGowan, Managing Director of Foreign Exchange, Bibby Financial Services, described he decision as “more than unlucky for the UK’s 5.5 million SMEs – British businesses are still battling with a very murky economic outlook, and this 0.5% percentage increase is unhelpful in the extreme.
“As inflation remains stubbornly high, questions have to be asked as to whether these consistent gradual rises are having the desired effect. Perhaps a policy of less frequent but higher increases would have had a greater impact on the process of managing inflation. UK businesses are now trapped in a cycle of uncertainty which makes planning very difficult. This problem is even more acute for companies trading internationally, as the latest interest rate rise further exacerbates the volatility inherent in FX markets.”
Mike Randall, CEO of Simply Asset Finance said: “Another hurdle for businesses as interest rates see a thirteenth consecutive rise. While this will certainly strike a chord with firms across the country, we’re seeing resilient business owners are already factoring this into their future operations.
“We know many small firms are already taking the opportunity to adapt their business models to counteract rising rates, but it’s vital they don’t put future investment decisions on hold. With small businesses accounting for 99% of the UK business population, and economic growth far below expectations, their success will be closely tied to future recovery.”
“It will take more than surging interest rates to slow SMEs down, but business leaders needn’t run the race alone. With the SME funding gap continuing to grow, the fact remains that SMEs need access to prompt and efficient specialist finance in order to keep the impact of future rate increases at arm’s length.”
Chad Rogerson, Director at Newton Europe said: “Interest rates continue to climb as the Bank of England tries to tame inflation – but cost-of-living woes are going nowhere. People across the UK are facing financial insecurity as their bills rise and their real wages stagnate – and this is especially true of mortgage-holders who are facing an average two-year fixed-rate deal of more than 6%.
“With over 800,000 households coming to the end of their mortgages in the coming months, and faced with much higher rates than before, many will be searching for the best deal to remortgage their homes. In the digital age we live in, the vast majority will remortgage online – which should be the simplest, most efficient way to do so. However, this isn’t the case for all. Newton’s new Vulnerability Void report reveals that nearly one in five (22%) vulnerable customers found remortgaging online to be a difficult process – this is three times more than those without vulnerable characteristics (7%). This was largely due to people feeling anxious during the process, finding the process too long, and not understanding what the website was trying to tell them.”