Do you remember the good days of November 2021 when the bank rate was only 0.1%?
The rate is now 1.25%, which is sure to drive up the cost of mortgages.
“Adjustable rate or tracker mortgage borrowers will be the hardest hit as their monthly costs will rise, and that could be a significant increase. Every quarter per cent increase in mortgage rates costs someone with a £200,000 repayment mortgage over 25 years an extra £27 a month,” said Sarah Pennells, consumer credit specialist at Royal London .
“While some owners will be able to afford it, others will undoubtedly struggle, especially as other costs skyrocket,” she added.
As expected, #MPC interest rates have risen slightly again, but they don’t send a decisive warning shot that they will do what it takes to bring inflation down. They are too concerned with refining the trajectory of GDP and not sufficiently concerned with the dangers of a double-digit price increase.
—Andrew Sentance (@asentance) June 16, 2022
Laith Khalaf, head of investment analysis at AJ Bell, said some could blame the Bank of England for bottling up the interest rate decision by not following the US Federal Reserve’s decision yesterday and opting for a higher increase.
“The Bank of England is playing a game of slow, slow inflation, rather than the shock and fear tactics employed across the Atlantic. Although the UK started to tighten monetary policy first, interest rates interest are now higher in the U.S. Markets will no doubt take this as a sign that the Bank of England has bottled it up, but a phased strategy allows the rate-setting committee to see more data as it comes in and to fine-tune its approach as circumstances dictate.The US economy also has more long-term fixed mortgages than the UK, making interest rates the other side of the pond a more brutal political tool, so the Fed has to create a bit more bang to have the same effect on a dollar,” Khalaf said.
“No one should mistakenly believe that interest rate hikes will have an impact on sky-high inflation levels in the near term. Our inflation problem is fueled by a supply shock in energy markets resulting from the conflict in Ukraine and the sanctions that followed, and no amount of interest rate hikes will solve this problem. What the Bank is trying to do is to prevent second-order inflationary effects from taking root in the system and only take on a life of their own,” he added.
With the Bank doing exactly as expected, there was little to no reaction from the FTSE 100, which remains deep in the red at 7,095, down 179 points (2.5%).
12:10 p.m .: The quarter-point rise is good news for savers
Martin Lawrence, chief investment officer at Wesleyan, the mutual specializing in financial services, was quick in his comment and probably thanked the Bank for doing as expected and raising its key rate to 1.25%.
“Faced with runaway inflation, the Bank of England was under immense pressure to act urgently, so today’s announcement comes as no real surprise. We expect further interest rate hikes towards 3% in the coming months; however, the MPC’s hands are partially tied in that they cannot raise rates too high or too quickly or stifle the UK economy.
“Higher interest rates can be good news for those with cash savings, but only when providers pass the base rate on to their customers. For those who are lucky enough to have money in savings, they should consider all options to maximize their financial returns, such as investing in stocks and shares ISAs and other products that look beyond volatility to short term for the purpose of long term gains. ,” he said.
The Bank of England’s base rate has risen for the fifth time since December and now stands at 1.25%, after today’s rate, its highest level since 2009. https://t.co/unFQP8xrKt #Interest rate #inflation
— Independent Advisor (@BlackthornFs) June 16, 2022
12:02 p.m .: The Bank of England sticks to the script
As expected, the Board of Directors of the Bank of England announced a quarter point increase in its key rate to 1.25%. The committee voted for the change by six votes to three.
MORE: The Monetary Policy Committee voted by a 6-3 majority to raise interest rates to 1.25%
-BNN ????????? Newsroom (@BNNUK) June 16, 2022
The consensus forecast is that the Bank of England will raise its key rate to 1.25% from 1.0% midday, although some experts are speculating it will go a little further.
That, however, would be out of place for the Monetary Policy Committee (MPC), which tends to limit changes to a quarter point (unless Norman Lamont is Chancellor of the Exchequer).
“Another 25bps is fully expected – anything more seems unlikely since the MPC is extremely worried about a tightening leading to recession but…with the Fed’s bold move, there’s probably more of a chance that we see 50 bps – three voted for that last time and a fourth might be enough if the other five are split between 25 bps and doing nothing I wouldn’t be surprised if the BoE votes for 50 bps basis,” Neil Wilson told markets.com.
10:45 a.m .: A quarter-point increase is expected
The Bank of England’s Monetary Policy Committee (MPC) will announce its decision on interest rates later today. Coverage of the announcement and reaction to it will be on this channel.
The decision comes a day after the US Federal Reserve announced a three-quarters percentage point rate hike – called 75 basis points (BP) in trader jargon – and a half-point hike by the Swiss National Bank today.
“With an aggressive Fed hike, we could well see further losses for GBP/USD in case the BoE doesn’t seem very hawkish. The MPC’s decision is not easy. It must balance the risk of maintaining the inflation persistently high by not being too aggressive in an uncertain growth environment,” said Fawad Razaqzada, market analyst at City Index and FOREX.com.
“Inflation accelerated to 7.8% in the 12 months to April 2022, from 6.2% in March. The UK jobs market is also strong enough to warrant a rate hike. The fact that the UK government has provided an additional £15bn of government stimulus is also a reason for the hikes to continue, even if the economic outlook looks bleak.We are likely to see hikes in June, August and September, but questions remain. As to whether the BoE will pick up the pace of the hikes, a lot will depend on inflation and at the moment it doesn’t look like it’s crashing anytime soon.
“Worrying, however, is that several macroeconomic indicators have disappointed expectations and with inflation eating away at consumers’ disposable income, a recession may not be inevitable despite government support. Indeed, consumer confidence remains very weak, while the latest PMI indices suggest a sharp slowdown in business activity is coming,” he added.
Martin Beck, the EY ITEM club’s chief economic adviser, agrees that the MPC find themselves hitting a sticky wicket.
“The economy is seeing rising supply-led inflation at the same time as demand weakens, leaving the MPC in a tough spot ahead of its interest rate decision this month. Inflation CPI inflation hit 9% in April, the highest since March 1982, although slightly below MPC expectations.In addition to inflation still exceeding the 2% target, MPC concerns about the pressure on wages and prices from a tight job market will not have been eased by a fall in the unemployment rate to just 3.7% in the first quarter, the lowest since the beginning of the summer of 1974 , and job vacancies hit a new high, but while the MPC isn’t running out of reasons to raise rates, it will also be mindful of the risks of policy tightening at a time when some growth indicators have started flashing red. For example, GDP fell in March and April, while consumer confidence fell. dropped significantly in April,” Beck said.
“The committee raised rates in May, despite forecasts of two quarters of negative growth over the next year, suggesting it may not be influenced much by evidence of a less buoyant economy. Overall, the EY ITEM club believes a majority will put inflation concerns above growth concerns and vote for a 25 basis point hike in the Bank Rate, although the consensus is likely to prefer an approach more gradual tightening and continues to push back bullish market rate expectations.
“Investors are still expecting further rate hikes at every meeting this year, taking the Bank Rate to 2.25% by the end of 2022, but the May MPC forecast showed inflation would fall well. below the 2% target by 2024 if rates follow such a path and the uncertainty surrounding the outlook, particularly over how “sticky” high inflation will turn out, and whether people will return who have become inactive during the pandemic in the labor market, should encourage a cautious approach,” he added.
The big question, according to Marshall Gittler of BDSweiss, is what the vote will be.
“Last time, three of the nine members of the Monetary Policy Committee (MPC) voted for a 50 basis point hike. Will they vote for it again? Will anyone else join them? On the other hand, with growth slowing down, will anyone vote no?” The MPC could be sharply divided,” he speculated.