The Bank of England raised the UK base rate for the 14th time in a row on 3 August, increasing rates by another 0.25 percentage points to 5.25%, which is the highest that the base rate has been since April 2008.
The Monetary Policy Committee (MPC) voted 6 to 3 in favour of the 0.25% rate rise, with two members preferring a steeper rise of 0.5% and one preferring to leave the rate at 5.00%.
The MPC stated that it expects inflation in the UK to soften over the next five months, ending the year at 5%. However, further rate rises haven’t been ruled out “if there was evidence of more persistent (inflationary) pressures”.
The announced rise was in line with market expectations. Nicholas Hyett, investment manager at Wealth Club, comments: “Central bankers will be fed up with questions about whether they’ve reached their destination. But that doesn’t mean they’ve gone away. Is this the peak for rates, or has one of the most painful interest rate accelerations in living memory got further to go?
“The MPC is sitting on the fence in these minutes. Recent strength in wage growth has clearly got Bailey & co. worried. But there’s also a recognition that the past rate rises are starting to weigh on economic activity, which has led to a slight slowdown in rate rises.”
Ben Beadle, chief executive at the National Residential Landlords Association, says the rate rise will pile yet more pressure on to both renters and landlords. He adds: “The Bank of England has warned that the average increase in monthly repayments on buy-to-let mortgages by the end of 2025 will be around £275. This comes as some landlords have already seen their mortgage payments increase by almost 240% since December 2021.
“With landlord profits at their lowest level for 16 years, the vast majority are doing all they can to protect tenants from the impact of growing mortgage rates. However, without Government action, renters face a bleak future as growing costs lead to a loss of more rental homes from the market.
“Analysis for the NRLA has found that 735,000 rental properties could be lost across the UK if interest rates peaked at 5%. With an average of 20 requests to view each available home to rent already, (this) announcement will only worsen matters.”
Andy Mielczarek, founder and CEO at SmartSave, says: “There has been a huge difference between the base rate and the interest rates made available to savers by high street banks. As inflation remains elevated, it is critically important that savers have access to competitive rates.
“For people in a position to put away a lump sum, there are a number of fixed-rate products currently topping the base rate that savers can make the most of to grow their money. Crucially, these are covered by the same Financial Services Compensation Scheme (FSCS) protection in the same way as traditional banks, which will offer consumers security and peace of mind.”
Emily Williams, director of research at Savills, says: “We don’t expect this decision to have a significant impact on the mortgage market. Lenders began to price in further rate rises from early June, and swap rates have been falling since early July, even in anticipation of (this) rate rise.
“But affordability remains a concern for many and is weighing on both prices and activity. The number of mortgage approvals in June was still at just 85% of its pre-covid average, according to the Bank of England. This was accompanied by a fall in the number of sales agreed to 87% of their pre-covid average in June from 97% in May, according to TwentyCI, and points to the continued need for vendors to price realistically.”
Giles Coghlan, chief market analyst, consulting for HYCM, says the decision was a close call as policymakers were divided between a 25bps or 50bps rate hike. He adds: “Given that the latest inflation data has shown that the Bank of England’s bitter medicine is starting to work, shifting gears down to a 25bps hike was sensible.
“The expectation now is that inflation will continue its descent next month, when the energy price cap data will start coming out of the inflation print. Although core inflation remains sticky at 6.9%, it should continue to trend downwards to more palatable levels.
“Despite concerns about economic growth, (this) hike is yet another sign that the central bank’s quantitative tightening could be nearing completion, and we should see the hiking cycle soon coming to a halt, with more modest hikes in the pipeline until then.”
Lastly, MattSmith, Rightmove’s mortgage expert, comments: “After a rollercoaster few weeks, the market position today is actually largely similar to six weeks ago, in that (this) rate increase was much anticipated by lenders and has been largely factored in already to mortgage rates, meaning we expect mortgage rates to continue their slow downward trajectory over the next few weeks.”
