The Bank of England has announced today (2 February) that interest rates have raised by 0.5 percentage points to 4%, signalling a 14-year high and peak inflation across the United Kingdom
The news of the interest rate rise comes as a meeting held on 1 February saw a majority vote by the Monetary Policy Committee (7-2) to increase the Bank Rate by 0.5 per cent. Two members of the MPC voted to maintain Bank Rate at 3.5%.
Why is the Bank of England raising interest rates?
The rise to 4% is the tenth successive interest rate increase by the Bank of England to dampen the impact of inflation as the UK faces a risk of recession. In the 2008-2012 recession, inflation was close to 5% in the third quarter of 2008.
Amid the cost of living crisis and the worst fall in living standards in any financial year since ONS records began, the Bank stated that the 0.5 increase was needed as UK domestic inflationary pressures and wage rises were firmer than expected.
However, there appears to be light at the end of the tunnel, as documentation released by BoE suggests that this may be the last for a while, as the statement indicates that interest rates may peak at the new rate of 4 per cent, below the originally predicted rate of 4.5 per cent expected by financial markets.
The BoE has stated that they will continue to monitor inflation and only tighten monetary policy further “if there were to be evidence of more persistent [inflationary] pressures”.
How will the interest rate rise affect mortgage payments?
The rise in interest rate will hit those on a variable rate mortgage the hardest. A variable rate mortgage is a type of mortgage which can go up and down in line with interest rate.
It is estimated that around 2m homeowners in the UK are on variable mortgages and will see an almost immediate rise in monthly repayments following the interest rate rise.
The increase in mortgage repayments will be crippling to those already deeply impacted by the cost of living crisis.
Those on a fixed-rate loan in the UK will be covered by an immediate price hike, but those whose deals are set to expire in February and March will also see increased mortgages once this security is gone.
Raising interest rates will hike up mortgages (& rents) when millions are already struggling to get by, worsening the current crisis for the sake of making it look like something’s being done.
Bank of England trying to stitch up a wound by hitting it repeatedly with a hammer. https://t.co/lo6J9AMRRD
— Alex Collinson (@Alex__Collinson) February 2, 2023
BBL, CBILS, mortgages, domestic loans are all going up when our cost of living and doing business is the highest it’s been in our lifetimes. The Bank of England seems to be completely oblivious to the medium term impacts these rises as they continue are going to have on our lives
— Dom. (@bigheadcomms) February 2, 2023
What do increased interest rates mean for the UK construction industry?
The Bank of England’s interest rate rise will also have knock-on impacts on the UK construction industry, as the sector will see projects become more expensive due to the material cost increase in line with inflation.
In turn, as projects become more expensive, companies can expect to see a reduction in profit due to increased interest rates on project loans. Some projects may also expect to see a hiatus.
Those in the housebuilding industry may also see reduced demand for housing as mortgage rates increase, making buying a home inaccessible for many bidding homebuyers.
‘Today’s rates extend the period of market correction’
Commenting on the announcement, Andy Sommerville, director at Search Acumen, said: “With interest rates now at their highest level since 2008, the rising cost of borrowing is significantly shifting the dynamics of the commercial and residential property markets.
“New Bank of England data shows mortgage approvals have fallen by 23%, and we saw 8% decline in commercial transaction volumes through 2022, as the increased cost of capital put pressure on investors, ultimately kick starting a period of price correction across most sectors.
“Today’s rates increase will extend this period of market correction as property owners and investors have to contemplate rising costs, the impacts of persistently high inflation on occupier demand, and the prospect of declining valuations.
“While transaction volumes may well decline further through this period of adjustment, there’s unlikely to be a corresponding moment of calm for property professionals as the pressure to drive efficiencies in due diligence becomes even more acute in a challenging market. In times of turbulence, innovation and game changing technologies, like AI, automation and digital data, is always a determining factor in companies’ ability to drive these efficiencies, deliver better advice and make better decisions.”
The hike in interest rates will impact first-time buyers severely
Co-founder and CEO of Wayhome, Nigel Purves, added: “Yet another hike in interest rates will do little to help the nation’s first-time buyers who have not only suffered due to an extremely inflated rate of house price growth during the pandemic, but now face higher monthly mortgage payments when they do finally make it onto the ladder.
For many, this will only push their aspirations of homeownership further out of reach, as they find they can no longer make the jump as the mortgage required is no longer affordable for them.”
Taxing the economy is not the solution to growth
CEO of RIFT Tax Refunds, Bradley Post, stated: “A further squeezing of borrowing costs will not help the cost of living crisis one jot. Together with the highest tax burden in decades the hard-working public could be forgiven for believing that the powers-that-be do not exactly have their back, so to speak.
It’s a debatable point, however in order to avoid a full-blown recession the government needs to now look at mitigating taxation for individuals and for businesses, starting with a reduction in corporation tax to help small businesses invest and expand so that their workforce can thrive too. Growing our economy is crucial at this time and taxing it until the pips squeak is not conducive with that.”
Lydia Bamford
Digital Editor
PBC Today
