Bank of England hikes rates to 4.25%

This increase in the base rate, while expected, is likely to put a further squeeze on the already overheated UK rental market. The shortage of affordable housing stock is widely documented. However, it looks like savers who are waiting for a fall in borrowing rates before they purchase are likely to defer their decision for longer. In the short term, this is likely to add further pressure to rents as the supply / demand imbalance continues. Landlords are also likely to increase rates to mitigate the impact of higher borrowing costs. This latest rate hike is a blow for tenants as much as it is many borrowers.

The MPC has voted once again to increase the base rate to 4.25% on the back of inflation creeping up last month. This is a slap in the face for hard-working families up and down the country. This will pile further pressure on households and small to medium-sized businesses, which I think is a huge mistake.

This week's CPI Inflation data may have nailed this 0.25% interest rate rise to the mast, but businesses can look to the rate-setting committee's minutes for some confidence and certainty. It says CPI inflation increased unexpectedly in the latest release but it remains likely to fall sharply over the rest of the year. As long as it does start to fall away sharply, then business confidence will return and grow.

Where the Fed leads, the Bank of England has to follow. This has been the case for much of this period as a large chunk of our inflation comes from the weakness of Sterling versus the Dollar. The good news is that the Fed appears to have adopted the correct strategy, as overall the US economy is proving to be robust and, with the exception of the obvious waves amongst specialist financial institutions, they look to be riding out the current storm. Looking at the UK's economic picture, this seems to be replicated. Yes it will bring a lot of pain to regular people but it looks like we may escape this without substantial business failures and significant unemployment.

After Wednesday's announcement that inflation had risen to 10.4%, it was inevitable that the base rate would increase today to further reduce inflation quicker. With the spring Budget confirming that the OBR believes inflation will be 2.9% by the end of the year, the government have major work to do for that to be achieved. Increasing the base rate is one thing, but will this really help?

Further base rate rises are opening up more options for innovative financial planning solutions. With the current market volatility, many retirees are looking for secure returns to meet their income needs. One option that has opened up recently is purchasing National Savings & Investment products within a Self Invested Personal Pension, something we find many clients are unaware they can do. The current return on an NS&I guaranteed growth bond is 4%, which may well increase to 4.25% after the rate rise today. The return is still well below inflation, but with volatile markets and worry over the banking sector, the option of a guaranteed return and a £1m capital guarantee provided by NS&I will look tempting for some retirees.

Increasing interest rates is a blunt instrument and we may rue the BoE's decision to increase them yet again, even if (just) by 0.25%. Inflation will come down. March's increase was as much technical as it was about costs increasing. The BoE needs to take the lead and not follow the Fed. It also needs to work in hand with the Government rather than against it at times like this.

Price stability remains the primary macroeconomic objective of both the U.S and the UK. We have seen the UK housing market cool slightly over previous months as the cost of borrowing has increased. As with the previous 10 base rate increases, those on variable rate or tracker mortgages will imminently face higher monthly mortgage payments. 5-year fixed rates remain lower than 2-year fixed rates, a stark contrast to what we have seen in recent years. We can conclude that lenders are expecting rates to fall in 2024, hence the discrepancy in pricing. The recent slump in housing transactions can be largely attributed to the fourth quarter of 2022. Due to the lag effect of data collection, it is only now that these figures are being observed. The increase has been widely expected by those across the financial services sector. As such, I expect to see little fluctuation resulting from today’s news. We still expect further increases to 4.5%-5% before we see rates start to come down.

The hope of the base rate not increasing was quashed as soon as the data landed yesterday around inflation. The positive, though, is that many lenders have already factored this increase into their current rates and so we are unlikely to see any dramatic changes to the pricing of fixed rate mortgages.

Inflation has been too high for too long, therefore the 11th rate increase in a row will come as no shock to many. Since the fourth quarter of 2022, mortgage rates have been steadily reducing, which has helped soften the blow for buyers across the country. We are still seeing strong demand among home movers, however buyers clearly need to factor in the increased cost of mortgages. Providing people are reasonable with their numbers, we are still going to see good volumes of transactions in 2023, despite the base rate increase. Buyers want to buy, sellers want to sell and property experts need to give accurate, honest advice to ensure we can all help things to tick along.

The Bank of England has really had no choice but to raise the base rate with the recent news that inflation was still on the rise. To me the prediction that inflation will be at 2.9% by the end of the year looks fanciful at best and if they can't get this under control soon more base rate rises could be on the way.

In terms of interest rates being charged by lenders swap rates have been on the rise again in recent days so we may start to see lenders increasing their rates again soon even though rates have been falling for the past seven to ten days.

Personally, I will be interested to see if lenders are as quick to pass on increases to their savings rates to customers as they are to pass on the increases to the Standard Variable Rate that they charge mortgage customers.

Another Bank of England meeting, another base rate hike. The consensus amongst most market commentators was that inflation would fall quickly this year. But there's no sign of that yet, the opposite in fact.

The economic thumbscrews can only be tightened so far, let's hope this rate rise is the last.

It was pretty obvious when inflation took a surprise jump upwards in February that the BOE's hands were tied and they'd have to push on with another rate rise. Who'd have thought salad costs would be dictating millions of peoples mortgage rates!

As long as inflation remains high, interest rates will continue to rise until the Monetary Policy Committee is confident they are on track to hit their inflation target. It's simply monetary policy in action and we shouldn't be surprised by this latest decision. The good news is, it feels like lenders have already priced their fixed rates taking potential future base rate rises into account.