In the most significant interest rate hike in over three decades, the Bank of England has increased the base rate to 3%. While financial markets widely expected the 0.75% increase, it will still create further anxiety for millions with variable-rate and tracker mortgages. With many already struggling with higher living costs and soaring energy bills, the impact of the supersized hike could be huge.
The central bank issued a warning after announcing the increase, with officials stating that many homeowners will now face much higher repayments. The 0.75% increase is the biggest in 33 years and has taken the base rate up to its highest level in 14 years. Presently, around 80% of mortgages are fixed-rate, but as deals end, homeowners could find themselves paying thousands of pounds extra each year.
Further impact on spending and heightened risk of recession
There is little doubt that the latest increase, coupled with expected future hikes, will considerably affect consumer spending. With many households struggling to make ends meet due to rocketing living costs, the interest rate hike could push some over the financial edge.
The Bank of England has acknowledged that its latest hike will further dampen spending and has warned that the UK now faces its longest-ever recession. Officials from the central bank believe there will be a two-year slump and that unemployment levels could double by 2025.
Andrew Bailey, the Governor of the Bank of England, said households in the UK faced a ‘tough road ahead.’ But he added that action to bring down inflation had to be taken now to avoid an even worse situation. The cost of living has been rising at its fastest rate in four decades, and the central bank has made it clear that aggressive action is needed to bring it back under control.
The chancellor, Jeremy Hunt, said that inflation had become an enormous burden for households and that the government had to act to bring it under control.
He said: “The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.”
However, the shadow chancellor, Rachel Reeves, said that the rate hikes were putting further pressure on millions of families who could not afford to cope with the increases. She stated that families were not “in a position to withstand these sorts of interest rate rises when we’ve got rising food prices, rising energy bills, and now higher mortgage rates as well.”
In the meantime, the central bank has suggested that interest rates could peak at 4.5% in autumn 2023. This is lower than the recent predictions made following the disastrous mini-budget delivered under Liz Truss’s leadership, where analysts believed the rate could peak at 6%.