More pain for borrowers as BoE hikes rates yet again

The Bank of England has cast its verdict: there is to be no respite for mortgage holders just yet.

The central bank has pushed up the cost of borrowing to its highest level in nearly 15 years in a bid to curb the soaring cost of living. Amid concerns about stubbornly high inflation, the Monetary Policy Committee lifted interest rates for the eleventh time in a row, from 4% to 4.25%.

Those on typical tracker mortgage deals will now pay about £24 more a month while those on standard variable rate mortgages face a £15 jump.

Two committee members voted to hold rates steady, reasoning that the impact of previous rises had yet to feed through to the economy. But they were outnumbered by the seven remaining members wishing to impose another hike – albeit a less aggressive one than the previous five half-point rate rises.

The uplift will have been partly informed by surprise inflation figures released earlier this week. After falling for three consecutive months, the inflation rate unexpectedly jumped again last month to 10.4%, from 10.1% in January, largely pushed up by vegetable shortages, which took food inflation to a 45-year high.

The MPC’s decision mirrors yesterday’s hike in the US, where the Federal Reserve increased interest rates by 0.25 percentage points to 5%. 

Notably, both central banks appear undeterred by the recent demise of Silicon Valley Bank and Credit Suisse – both of which buckled in part due to the strain placed on them by higher interest rates. 

The global financial turmoil of recent weeks is a reminder of the fine balancing act central banks must perform, as they strive to tame the inflationary beast without slowing down the economy too much. 

That said, the Fed has reassured the public that SVB is an “outlier” in an otherwise strong financial system while the BoE insisted today that the UK banking system “remains resilient” despite recent market volatility. And the fact that both have pressed ahead with another rate hike shows that curbing inflation remains their number one priority. 

Priorities aside, how confident can we be that raising interest rates will actually achieve its desired effect of cooling prices? 

Rate rises are used to push up the cost of borrowing, the logic being that people will subsequently spend less on goods and services, and this fall in demand will, in turn, bring down prices. 

But one potential challenge here is that inflation is in large part being driven by the soaring cost of basic goods like food. With higher food prices, the problem is more to do with too little supply than it is too much demand. What’s more, there’s only so much you can bring down demand: people need to eat. 

It’s not all bad news, however.

Despite February’s shock inflationary rise, the MPC remains optimistic about its forecasts for the year. In fact, it predicts that inflation will fall sharply in the April-June period, “to a lower rate than anticipated” even last month, on the back of the Budget’s cost-of-living measures. And it no longer expects the UK to enter a recession in the coming months. 

The betting now is that, when the MPC next meets in May, they will press the pause button on rates.  

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