Save content
Have you found this content useful? Use the button above to save it to your profile.
bank of england at dusk
istock_Mark_Thomas_Photo_BOE

Bank of England hikes interest rates for 14th time

by

As inflation fell more than expected in June, the Bank of England has greenlighted another interest rate increase. The decision takes the UK’s Bank Rate to its highest point since 2008.

3rd Aug 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

Trapped between high inflation and an economy on the brink of recession, the Bank of England (BoE) has once again increased the UK interest rate, updating its figure to 5.25%.

Opting for a smaller increase when compared to previous announcements, the Bank of England’s Monetary Policy Committee (MPC) voted on the quarter percentage point increase with a vote split of 6 to 2 to 1. Two members preferred to increase bank rate by 0.5% to 5.5%, arguing that “it was important to lean more actively against inflation persistence”.

One member preferred to maintain Bank Rate at 5%, arguing that, as the policy stance had become increasingly restrictive, there was no longer a strong case for further tightening on risk management grounds.

In its report, the MPC argued that “the labour market remains tight but there are some indications that it is loosening”, as one of the main drivers behind its decision. It forecasted a further drop of inflation to 5% by the end of the year. The MPC has also stuck to Q2 2025 as their target to reach 2% inflation. 

Today’s increase mirrors the Federal Reserve’s recent decision to also increase borrowing costs by a quarter percentage point, taking their current figure from 5.25% to 5.5%. The Eurozone was also in lockstep with its contemporaries, increasing its interest rate from 3.25% to 3.5%.

Inflation falls

The Bank of England’s decision comes off the back of some relative relief to the UK economy, with June’s inflation figure dropping from 8.7% in May to 7.9%. While the current percentage is still a far cry from the BoE’s inflation target of 2%, the recent easing of inflation pressure will likely be seen as justification for the BoE’s aggressive increases of the bank rate.

Commenting in the wake of the announcement, Chancellor of the Exchequer Jeremy Hunt remained positive that inflation can be curtailed, but called for caution as the UK continues to struggle with higher mortgage bills.

“If we stick to the plan, the Bank forecasts inflation will be below 3% in a year’s time without the economy falling into a recession. But that doesn’t mean it’s easy for families facing higher mortgage bills so we will continue to do what we can to help households,” Hunt said.

However, while the government was optimistic, the MPC stated that it will “continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole” with a focus on the tightness of the labour market.

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the report added.

The profession reacts

Commenting on the increase, Della Hudson, founder of Minerva Accounting, said she has been having more difficult conversations with clients as costs continue to rise.

“A lot of investment isn’t going ahead, which means that that’s reducing the income for many businesses. I’m sadly having lots of meetings with clients who are looking at winding up their businesses at the moment because it has become less profitable for them to be running a business,” Hudson said.

In light of this, Hudson was adamant that now is the time to offer as much support as possible to struggling clients, noting that while some may find that the right decision is to wind up their business, others may really benefit from professional advice.

“We are always trying to find ways to improve our clients’ businesses so that they can continue, and do just as well, if not better.”

Adam Zoucha MD EMEA of FloQast said: “Organisations that might previously have had projects on their roadmap, aligned with upcoming investment, might pause for thought.

“The crucial thing here, is to prioritise the projects that can free up resources, to drive the business forward.”

Tags:

Replies (34)

Please login or register to join the discussion.

JD Portrait
By John Downes
03rd Aug 2023 12:06

This is insanity. They are doing their best to turn a recession into a slump.

Thanks (15)
Replying to John Downes:
avatar
By Arcadia
03rd Aug 2023 12:27

Agreed. There are already signs that inflation is falling, and with the lag in effect that results from the fact that most mortgages are on 2 year terms, the impact of past rate increases is not yet felt. There is a huge crash coming down the line. They have vastly overdone the interest rate rises, and no, I don't trust you Mr Sunak. Interest rates are a huge blunt instrument to control inflation - taxation is much better at this, and can be better targeted. But of course the electorate would blame the government for tax rises, but interest rates are the fault of the 'independent' Bank of England. The mechanism by which interest rates are supposed to control inflation, by removing spending power from the economy doesn't bear 10 seconds scrutiny. The UK level of inflation, we were told, was caused by external factors such as Covid, the war in Ukraine, impact on energy, grain etc. So how does increasing interest rates on mortgages tackle this? On the one hand the government accepted that support was needed for the population against swinging increases in energy costs, and on the other hand is saying that excess money needs to be taken away from the same people to stop them spending it! Then the government is apparently taking banks to task for not passing on interest rate rises to savers. But if they do, won't that pump money into the economy again and push up inflation? It couldn't possibly be that people with savings are generally going to be conservative voters needing a bung before the election could it? They wouldn't play fast and loose with the economy in that way would they? Not our highly principled and trustworthy prime minister surely?

Thanks (6)
Replying to Arcadia:
avatar
By Tim 59
03rd Aug 2023 13:23

Did you take an excessively large mortgage in the belief that historically low interest rates would continue indefinitely? Basic economic theory says interest rate equals inflation plus risk premium. Deposit holders have endured negative real rates for years. Mortgage brokers have encouraged home buyers to maximise loans and chase up house prices for many years. Instead of looking at affordability and being prudent when financing home purchases many buyers have gambled and treated it as an investment. Rates are still low when looking at historic rates. Those that have enjoyed cheap money and speculated rather than seeing you purchase as your home. Cash up and take your gain before prices collapse.

Thanks (4)
Replying to Tim 59:
avatar
By Arcadia
03rd Aug 2023 14:17

I have quite a small mortgage on a 5 year fix, so I am not bitter about the current situation from a personal perspective. I am trying to understand what is happening in the economy as a whole, and whether the government and the Bank are pursuing the right policies, and as you say, they seem to be pursuing the same old same old, and it doesn't look like it is going to work. No-one appears to have a rational explanation for why interest rate rises are the answer or why 'historical' rates are a benchmark for the future. Why shouldn't the cost of borrowing remain low? The price of food is much lower in real terms than it was in centuries past, or even a few decades ago, but no-one argues we need to raise those prices to get back to some historical norm. I agree that the financial services industry is culpable, and further that the politicians are in thrall to it. If you cash in your 'gains' on house purchase, you still need to pay for somewhere to live.

Thanks (0)
avatar
By Self-Employed and Happy
03rd Aug 2023 12:08

The "relief" in inflation is absolutely **** all to do with BoEs stupidity of interest rate rises, so patting them on the back with words like "justification" is nothing more than page filling.

Thanks (13)
Replying to Self-Employed and Happy:
By Nick Graves
03rd Aug 2023 12:27

They believe the snake oil that 'demand destruction' leads to surpluses, blissfully unaware that the surpluses disappear due to 'supply destruction' as well.

Anyway, since one cannot taper a Ponzi scheme, they really don't care about the general economy/population. It's all about keeping the plates spinning a bit longer for the central banksters and government 'finance'.

Thanks (7)
avatar
By johnjenkins
03rd Aug 2023 12:20

"As inflation fell more than expected in June" He puts the rate up. Shudder to think how much he would have put it up if it fell less than expected.

Thanks (10)
avatar
By Justin Bryant
03rd Aug 2023 12:34

No-one reports how £GBP has dropped 5 cents in the past week or so vs. $US i.e. the medium/long term UK interest rate expectation (relative to US) has significantly decreased recently and that's all that matters really re mortgage rates etc.

Thanks (0)
Replying to Justin Bryant:
By Ruddles
03rd Aug 2023 13:55

Justin Bryant wrote:

No-one reports how £GBP has dropped 5 cents in the past week or so vs. $US


Perhaps because it hasn't
Thanks (1)
By ireallyshouldknowthisbut
03rd Aug 2023 12:35

Inflation is of course being caused by people with massive mortgages spending money like water, pushing up prices.

Thanks (10)
Replying to ireallyshouldknowthisbut:
avatar
By Justin Bryant
03rd Aug 2023 12:38

No-one forced those people to get massive mortgages. They certainly don't complain when the market moves in their favour do they? So why should they blame others when it doesn't?

Thanks (11)
Replying to Justin Bryant:
By ireallyshouldknowthisbut
03rd Aug 2023 13:24

Justin Bryant wrote:

No-one forced those people to get massive mortgages. They certainly don't complain when the market moves in their favour do they? So why should they blame others when it doesn't?

As ever you missed the point.

Inflation does not seem to be being caused by an over inflated economy with mortgage holders flush with cash to which interest rate rises would be a sound solution. Instead its mainly supply side issues coming from shocks in utility prices & food plus aided and abetted by general price gouging by dominant suppliers. It is notable to extent to which large corporations are increasing margins in the latest city results.

BofE are of course boxed in. To tackle their theoretical inflation target they only have one big tool - interest rates. The tool however seems to be at best blunt, and possibly quite useless. People with the biggest levels of disposals income don't tend to have big mortgages, so there is no general "soaking up" of spare cash in the economy.

Thanks (7)
Replying to ireallyshouldknowthisbut:
avatar
By Justin Bryant
03rd Aug 2023 14:20

That's got totally nothing to do with my comment, so I guess you've missed the point of my comment (which is that massive mortgagors are grown-ups and so should take the rough with the smooth at their own risk).

Thanks (2)
Replying to Justin Bryant:
By Ruddles
03rd Aug 2023 15:06

Eh? It has got nothing to do with your comment only because your response had nothing to do with the original comment.

You may as well have responded by saying "But the sky is blue" to which the follow up would have been "That has nothing to do with my comment which as about x, y and z". To which your follow-up would have been "But that has nothing to do with the colour of the sky".

In other words, the usual Justinian logic at work.

Thanks (4)
Replying to Justin Bryant:
avatar
By ASF
03rd Aug 2023 16:21

Massive or not (which I suppose is really only a function of income vs house price) one way or another renters or mortgagees will suffer the effects of interest rate hikes if they are not on fixed terms, so their ability to act like grown-ups (whatever that may means) seems rather restricted. They have to to pay for somewhere to live and if the cost of their accommodation is affected by interest rate rises or falls, then they are all impacted one way or another, even savers feel the changes, if differently through impacts on pensions funds, investments and the like. People's ability to act like grown-ups is always circumscribed by changes that may often be beyond their own control.

Thanks (0)
Replying to ASF:
avatar
By Justin Bryant
04th Aug 2023 12:27

Being overly sympathetic/indulgent to such massive mortgagor people is a classic example of "moral hazard". By "grown-up" I obviously mean that they are clearly not vulnerable people that need the State's protection (or perish the thought a taxpayer bailout).

Thanks (1)
avatar
By ASF
03rd Aug 2023 12:42

Absolute horsedung. This is supply-side inflation and hiking interest rates would take forever to cure that, even if it might one day work. Meanwhile those who are or are aspiring to become homeowners are really suffering badly. I'm afraid I think the Tories wrecked things back in the '80s with the sell of off council house stock. Failing to build any social housing (forget "enough"). private landlords, 2nd homeowners and foreign buyers buying up housing stock has just hiked house prices ridiculously.
Problem for borrowers is how much they pay, which effectively is Price (of housing) x rate (BOE). Interest rates are still historically relatively low, but housing prices very, very high, so repayments will be high. Everyone is moaning about the rate, when in reality it is the Price and availability (of housing) that is the problem. Interest rates are too blunt a tool and movement (up or down) just wrecks one side or the other of the borrowing or savings dynamic. Don't know easily how, but without house price corrections, (much) more housebuilding, curbs on non-personal (occupant) homebuyers/owners to bring down the pricing of the homeowning market, this will never be solved. 40 years of free-market house buying activity have led us to this place and all the messing around with interest rates will never solve it and won't bring this particular "brand" of inflation down. People can't afford to shop now, so how will another 0.25% do anything to help?

Thanks (4)
Replying to ASF:
avatar
By Justin Bryant
03rd Aug 2023 12:46

But not all FTBs are complaining e.g. those who can borrow from bank of mum & dad and are seeing much lower house prices (especially inflation adjusted).

Thanks (0)
Replying to Justin Bryant:
avatar
By ASF
03rd Aug 2023 13:12

Very true, but the percentage of those who can borrow the full asking price from BOMAD must be very small and so the rest probably only borrow a deposit, so are still left with a mortgage. Both groups must make up a small minority of the whole borrowing sector I would guess.

Thanks (1)
Replying to ASF:
avatar
By petestar1969
03rd Aug 2023 13:21

I'm a homeowner and I'm not suffering.....

Thanks (1)
Replying to petestar1969:
Danny Kent
By Viciuno
03rd Aug 2023 14:00

Have you just, or about to, re-mortgage?

Did you buy in the last few years when prices were historically high, and now find that your 95% mortgage can't be renewed so you're stuck on a punative variable rate?

How long ago did you buy your property? What is your LTV?

Just proving the point that these BOE rate hikes don't do what they are supposed to - especially not the in timeframe they have tried to use them.

Just because it hasn't effected you doesn't mean it wont later, or isn't important.

Thanks (0)
Replying to petestar1969:
avatar
By ASF
03rd Aug 2023 16:23

I am pleased for you, but let's face it what's is happening is not just about how it affects you or me, or possibly even people on this notice board, is it. "Losers and winners" and it's a sorry state of affairs if today's winners can't empathise with the losers, isn't it?

Thanks (0)
By Nebs
03rd Aug 2023 12:44

Sometime in the next 20 minutes I suppose we will hear from the banks to say that they have increased the interest rates paid to savers.

Thanks (1)
Replying to Nebs:
avatar
By vstrad
03rd Aug 2023 13:35

I've just had an email from the Coventry Building Society, telling me that savings rates are going up by 0.25% on 14 August.

Thanks (0)
Replying to vstrad:
By Nebs
03rd Aug 2023 14:08

I've just had an email from Marcus by Goldman Sachs saying rates are up by 0.3% from today, 3rd August.

Am I allowed to withdraw my facetious first comment?

Thanks (0)
avatar
By johnjenkins
03rd Aug 2023 12:50

I find it very weird that Fuel etc. is based on the price that the energy companies buy at (to a certain level). So there is no reason why mortgages shouldn't be based on the same principal and that rate stays throughout the lifetime of the mortgage (which can also be transferred to another property).

Thanks (0)
Replying to johnjenkins:
boxfile
By spilly
03rd Aug 2023 13:28

In the US mortgage rates are fixed for much longer terms, usually starting at a minimum of 10 years.
However, the knock-on effect is that their housing market has now slowed considerably as homeowners don’t want to change to a new higher rate mortgage unless absolutely necessary.

Thanks (0)
Replying to johnjenkins:
avatar
By ASF
03rd Aug 2023 16:24

But isn't the price you pay for your fuel only good for just that tank of fuel or the next 3 months until the Energy Price Cap moves again? Agree Energy companies use the futures market for much of their protection, but as well know, that is not static and move from month to month. As interest earnings for banks seem to make up a major slice of their income (with costs being taken from that), won't they always want to be able to move that up or possibly down as they see fit, much as we may not like it. The real issue there is the GAP between the interest rates they pay the BOE and those they charge to us in the retail market, and I saw a chart the other day that showed just how the gap between the two has widened in the last few years. That is where all their significantly increased profits look to be coming from. Not much incentive on them to control costs if they can just "arbitrage" the rates! Doesn't sound a million miles away from what the retail sector is being slated for right now either. Just seems to rest on whose turn it is to get picked on next – not that they don’t all deserve it!

Thanks (0)
Replying to ASF:
avatar
By johnjenkins
03rd Aug 2023 16:37

In the financial world it's a sellers market (you either pay rent or at the mercy of mortgage lenders, not too much choice). In the retail side it's a buyers market (you can shop around and do without). Little wonder the homeless figure has shot up.

Thanks (1)
avatar
By peter morgan
03rd Aug 2023 22:27

Here's an idea. Instead of taking money out of the economy by making mortgage holders give it to the greedy banks, why don't they instead just force employees to put more into their pensions. At least that way they get to keep it instead of bankers shoving it up their noses.

Thanks (1)
Replying to peter morgan:
By ireallyshouldknowthisbut
04th Aug 2023 09:51

Or they could just tax people with spare cash sloshing about.

Thanks (0)
Replying to ireallyshouldknowthisbut:
avatar
By johnjenkins
04th Aug 2023 10:50

Or they could just give us pocket money.

Thanks (0)
avatar
By AndrewV12
04th Aug 2023 12:26

As I understand it the majority of mortgages in the UK are fixed rate, which means if you are renewing a say 5 year mortgage deal, you will be hit with 14 interest rate hikes in one hit.

Hope I have got that right.

Also finally its good news for savers, the Yorkshire building society ( initially i accidently spelt it Soviet not society) are offing me 6 percent (two year deal).

Thanks (0)
avatar
By AndrewV12
04th Aug 2023 12:29

But don't forget interest rates are a fast moving story.

What was the interest rate headline around 2 years ago ......
Have a guess
Wrong,
The right answer is , Negative interest rates.

Thanks (0)