BoE raises interest rates

Concerns of a potential recession loom over the British economy following an unexpected move by the Bank of England to raise borrowing costs. In an attempt to tackle persistent high inflation, the bank’s Monetary Policy Committee decided to raise the main interest rate by half a percentage point to reach a 15-year high of 5%. This decision is anticipated to have a significant impact on borrowers, particularly homeowners who are due to refinance in the upcoming months.

The magnitude of this thirteenth consecutive interest rate hike caught many off guard, as most economists had predicted a smaller quarter-point increase. Some analysts even perceive this move as a panicked response, considering that there were hopes just last month of a pause in the rate-hiking cycle.

The financial markets are now factoring in the possibility of a rate peak of 6%, a level not witnessed since early 2000, after Bank Governor Andrew Bailey cautioned about further increases if inflation does not exhibit clear signs of abating. The Bank of England’s decision appears to be driven by concerns over inflation persisting longer than anticipated, as recent figures revealed that UK inflation unexpectedly held steady at 8.7%, following October’s peak of 11.1%.

Compared to other major economies, the UK has experienced more persistent inflation, with some attributing this phenomenon to the Bank’s delayed response in raising borrowing rates and the added import costs resulting from the country’s departure from the European Union. With rising wages, it is becoming increasingly evident that high inflation has become entrenched in the economy. Governor Bailey acknowledged the apprehension felt by individuals with mortgages or loans, but emphasised that delaying rate hikes could potentially exacerbate the situation.

In a synchronised move across Europe, central banks have also opted to raise borrowing costs, including the Swiss National Bank with a quarter-point increase and Norway with a half-point increase. Turkey has taken more drastic measures, signaling a departure from unconventional economic policies. Global banks, such as the US Federal Reserve and the European Central Bank, have been steadily raising interest rates over the past few years in an effort to curb inflation caused initially by supply chain disruptions due to the pandemic and later exacerbated by Russia’s invasion of Ukraine, which triggered surges in energy and food prices. While the Fed has paused its rate hikes for now, it has not ruled out the possibility of further increases this year.

Higher interest rates play a role in curbing inflation by raising the cost of borrowing for individuals and businesses, potentially leading to reduced spending, diminished demand, and alleviated price pressures. The recent rate hike in the UK will increase the burden on borrowers, particularly the approximately 1.4 million households expected to refinance their mortgages throughout the remainder of the year. Variable-rate mortgage holders, whose rates are tied to the bank’s base rate, will soon face higher repayments, while renters are also confronted with increases in rental costs.