The Bank of England increased interest rates from 0.5% to 0.75% today in an attempt to slow rising inflation, which reached 5.5% in January.
The base rate is now back to its pre-pandemic level and 25bps above its pre-Brexit referendum level.
Supply chain bottlenecks, material shortages and high gas and electricity prices have all acted as tailwinds to UK inflation since the global economy reopened following its Covid-induced shutdown in 2020.
Russia’s invasion of Ukraine has pushed energy and fuel prices even higher, pressuring the Bank to take action.
However, Annabelle Williams, personal finance specialist at Nutmeg, said rate hikes will have little impact on the main drivers of inflation.
“Prices have risen due to reasons largely outside of the Bank of England and the government’s control – the cost of petrol, food and other day-to-day items is rising because of global events,” she noted.
Hugh Gimber, global market strategist at JP Morgan Asset Management, said that high utility prices alone will have “a dampening effect on spending”.
However, he also noted that pent up capital saved during the pandemic – equivalent to about 10% of UK GDP – could maintain spending rates at a high level in the short term.
UK GDP growth slowed in December as consumers held their breath over the prospect of another lockdown, but progress jumped back in January, increasing 0.8% as the impact of Omicron was less than expected.
Myron Jobson, senior personal finance analyst at interactive investor, said homeowners will be hit the hardest by the rate hikes: “Higher interest rates will have an almost instant impact on the almost two million UK homeowners on variable rate mortgages.
“Those on a typical two-year tracker mortgage deal are likely to pay £27 a month more, while those on the average standard variable rate face an addition repayment burden of £32 a month.”
He added that mortgage rates for new buyers will lag today’s interest rate hike, so “anyone looking to buy or re-mortgage in the near future should consider securing a deal now”.
However, Arnab Das, global market strategist at Invesco, noted that despite the hike, the Monetary Policy Committee was considerably more dovish than at the last meeting.
This time around the vote was 8:1 for a hike, with the lone dissenter calling for a hold. Last time around there were four dissenters in favour of a 50-bp hike, instead of 25 bps.
“Views at the Bank on the outlook are also decidedly more uncertain, pointing to much greater caution and data dependence in the policy path from here,” he said.
“The Bank stated that modest tightening may be appropriate in future – instead of likely as at the last meeting. It also noted that the risks to the outlook are two-sided (as opposed to tilted towards higher inflation).”
On Wednesday, the Federal Reserve raised interest rates by 0.25bps. This was its first increase in four years.