UK mortgage payers hit with shock rate hike
The Bank of England (BoE) raised interest rates by half a percentage point on Thursday in a larger than expected move, as the UK government is struggling to tame the country’s worst inflation since the 1980s.
The BoE’s Monetary Policy Committee voted 7-2 for the increase, which brings the bank’s main rate to 5%, the highest level in 15 years and the biggest move since February. The 50 basis-point hike surprised markets, which had priced in a 25 basis-point rise.
The move marked a 13th consecutive interest rate hike, as the regulator faces the challenge of taming inflation without creating a mortgage crisis or a recession. The hike came after data published on Wednesday revealed stubbornly high inflation in the UK. However, higher interest rates will further strain British families with mortgages.
“We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later,” BoE Governor Andrew Bailey said.
The latest data released on Wednesday showed that consumer price inflation stood at 8.7% last month, unchanged from April but above the 8.4% predicted by economists. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices unexpectedly accelerated to a 31-year high of 7.1% year-on-year, cementing market expectations that the BoE would opt for another rate hike.
“The UK finds itself in the worst position of major western economies. A cost-of-living crisis, brought about by rising energy and food prices, has been amplified by structural labor shortages, and has now metastasized into ratcheting wages,” said Joseph Little, the global chief strategist at HSBC Asset Management.
Economists have called the move a “hawkish super-hike,” warning that the BoE is likely to “inflict more pain” on the country’s households as it grapples to return to the 2% inflation target.
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