The Bank of England (BoE) raised interest rates on 15 December by half a percentage point to 3.5%, the highest level in 14 years, and warned that further tightening of monetary policy was likely.

In a vote showing a majority on the central bank’s Monetary Policy Committee for “forceful” action against high inflation, six of the nine MPC members supported the 0.5 percentage point rate increase, and one favoured a larger 0.75 percentage point rise. The BoE has now increased interest rates at each of the past nine MPC meetings: the most aggressive set of rises since 1989.

Central banks across the world have been responding to surging inflation fuelled by the pandemic and Russia’s invasion of Ukraine. The US Federal Reserve raised its benchmark interest rate by 0.5 percentage points on 14 December and the European Central Bank increased its deposit rate by the same margin as the Fed on 15 December.

Andrew Bailey, BoE governor, said: “I know raising interest rates has a real impact on people’s lives, but by raising interest rates we can bring inflation down sooner and help the economy begin to grow and prosper once more.”

Market comment
Nicky Stevenson, managing director at national estate agent group Fine & Country, said of the base rate rise: “Rate-setters have begun to slow the pace of monetary tightening after data released earlier in the week suggested inflation may already have peaked. While price growth may finally be trending downwards, further interest rate hikes are still widely anticipated in the New Year, meaning home buyers will continue to see affordability stretched.

“A seasonal slowdown was expected. However, it seems amplified as many have pressed the pause button in their property searches. Buyers may gamble that borrowing costs may start to drift downwards again once the threat of inflation has been nullified. In the meantime, homeowners on variable and tracker mortgages continue to see their disposable incomes shrink as the cost of servicing their existing loans becomes more expensive. Those coming to the end of fixed deals will see an immediate spike in loan costs as they try to secure a new deal.”

The rate rise was a wakeup call for SMEs, according to Douglas Grant, Group CEO at Manx Financial Group, who said: “A rise in interest rates was expected despite fears the UK is falling into recession and has reached the highest level since October 2008. The hikes should continue to act as a wakeup call for SMEs to review their existing lending situation and ensure they are prepared. 

“This week’s slowing inflation data suggested that we may have reached a peak but still represented eye watering numbers and indicate that the start to 2023 will be difficult for many SMEs. We believe that demand for working capital will continue to rise as businesses desperately require liquidity provisions to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis. 

“Our research revealed that over a fifth of UK SMEs that required external finance over the last two years, were unable to access it. What’s more, over a quarter have had to stop or pause an area of their business because of a lack of finance. SMEs continue to struggle with accessing finance and, worryingly, this lack of availability is costing them and the UK economy in terms of growth at a time when it is needed the most. The amount of growth that is being sacrificed is significant and will require new solutions which are designed to address this funding gap.” 

Antony Antoniou, managing director at central London real estate agents, Robert Irving Burns (RIB), said of the Bank of England interest rate rises: “The Bank of England is going too hard and too fast. We are witnessing the fastest tightening in policy in the MPC’s history, with interest rates rising over 3 percentage points in 12 months.  

“While (the) drop in inflation was only 0.3%, it was significant because the data we now observe reflects the monetary policy made months ago. With raw materials and energy prices now coming back down to earth, five-year interest swaps dropping, and unemployment rates still historically low (3.7%), these interest rate rises feel unnecessary. The downside is stagnation in areas that should be key drivers for growth, such as development, construction, and the housing market. 

“Even the MPC members agree that you do see a much deeper and a longer recession with rates being much higher, and I agree that we now risk lengthening and deepening the recession if the tightening continues at this pace.”