The Bank of England (BoE) raised interest rates by 50 basis points (0.50 percentage points) on Thursday, bringing their key policy rate to 5% – the highest level since 2008.
The size of the hike surprised financial analysts, many of whom believed that the BoE would only raise rates by 25 basis points. The increase was also opposed by two members of the BoE's nine-person Monetary Policy Committee, who preferred to maintain rates at 4.5%.
The hike is the 13th time in a row that the BoE has increased rates in its ongoing attempt to temper the UK's soaring inflation rate, which, at 8.7%, is almost four-and-a-half times the BoE's 2% target rate.
"We've raised rates to 5% following recent data which showed that further action was needed to get inflation back down," said BoE Governor Andrew Bailey. "The economy is doing better than expected, but inflation is still too high and we've got to deal with it."
'It could be worse later'
In a press release, the BoE justified its move by noting that "recent data... indicates more persistence in the inflation process". It also noted that core inflation, which strips out energy and volatile food prices, "has been much stronger than projected".
The rate hike is likely to come as a shock to many mortgage borrowers, with some analysts warning of a potential "mortgage bomb" in the UK's housing sector as the BoE's rate hike is passed onto homeowners.
On Tuesday, The Financial Times reported that the number of mortgages available for prospective homeowners with small deposits (i.e. worth less than 5% of the value of the property) has fallen by 40% over the past year.
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Moreover, approximately 1.4 million current mortgage borrowers will have to pay higher rates this year as their fixed-rate terms expire. The rate on an average two-year fixed deal was 2.29% in November 2021. It has since risen to 6.19% – up from 5.26% in May.
The hike in mortage rates also comes at a time when many British citizens are struggling with a cost-of-living crisis unprecedented in modern British history, which is driven largely by high food and energy costs.
"We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them," Bailey said. "But if we don't raise rates now, it could be worse later. We are committed to return inflation to the 2% target and will make the decisions necessary to achieve that."
