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The Bank of England raises interest rates to 3%

03 November 2022

The UK central bank keeps hiking rates to combat inflation, but the latest rise could see homeowners facing a tough winter.

By Jonathan Jones,

Editor, Trustnet

The Bank of England has raised interest rates by 75 basis points to 3% today as the Monetary Policy Committee tries to arrest rampant inflation.

It is the largest individual increase since 1989 (excluding Black Wednesday in 1992) and the first time rates have climbed above 3% since November 2008. The rate hike was approved by a vote of seven to two, with the other members preferring a lower increase.

The Bank raises rates to curb inflation by discouraging people from spending money. Under former prime minister Liz Truss, it appeared that her pro-growth agenda and will to get Britain spending was at loggerheads with the Bank.

Now, it seems that new Conservative leader Rishi Sunak is on the same page as the Bank, planning to raise taxes and cut public spending, which should have the same effect as raising rates.

Nicholas Hyett, investment analyst at Wealth Club, said this change may lead to slowing rate rises and a lower end point than had previously been anticipated, although it is far too early to call when that may be as prices continue to climb.

Commentators are mixed on where rates will end up. Tom Stevenson, investment director for personal investing at Fidelity International, said they would likely peak at 4.5% next year, suggesting there is much further to go, while Alan Custis, head of UK equity at Lazard Asset Management, suggested a final rate of 4%.

Peter Doherty, head of fixed income at Sanlam Investments, said it is clear however that rates will not hit 5%, which had been priced into markets.

Rachel Winter, partner at Killik & Co, said the priority for people should be on future proofing against this prolonged period of higher inflation.

“This means carefully considering options, ideally with independent advice from a financial adviser, to ensure they are maximising every opportunity to mitigate longer-term risks and ensure the best returns.”

Rob Morgan, chief investment analyst at Charles Stanley, noted that savers are now starting to see some recompense for price rises, with higher rates on the most competitive savings products.

Interest rates on variable cash accounts continue to improve due to a combination of provider competition in the top rate tables and consecutive base rate rises.

Rachel Springall, finance expert at Moneyfacts, said: “Savers who want the flexibility of an easy access account will find the average rate is now over 1%, the first time this level has been breached in a decade, and top rates now exceed 2%.”

However, the majority of the biggest high street banks have failed to pass the full Bank of England base rate rises on to easy access accounts. One has passed on just 0.14% since December 2021, Springall noted, meaning that the most competitive rates are coming from the challenger banks, and savers may need to shop around.

In addition to cash rates increasing, Morgan said that the income available from financial assets such as shares and corporate bonds was now “more compelling” following market falls since the turn of the year.

“They could provide opportunities as and when central banks’ thoughts turn to cutting rates as inflation subsides and recession red flags emerge.”

However, higher cash rates may be of little comfort to homeowners with mortgages, as higher rates mean an increase in the amount of interest paid on loans.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said “Those who have secured a new fixed-rate deal in the last couple of months will be breathing a sigh of relief, but for anyone on a standard variable rate or tracker mortgage, this news could be a real source of concern.

“Expectations are that the industry will see an upwards trend of defaults on mortgage payments in the coming months, and so we urge anyone fearing that they may struggle to go straight to their mortgage provider for guidance.”

The Bank’s decision comes after the US Federal Reserve upped rates by 75 basis points on Wednesday night, the fourth consecutive such rise.

Initial market reaction was positive, with US markets reversing earlier losses as the rhetoric suggested the Federal Reserve was cognisant of policy error.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Despite cooling off slightly, US inflation remains uncomfortably high and the labour market very tight, so it comes as little surprise that the Federal Reserve has today delivered yet another 75 basis point rate hike.

“This latest increase reiterates the Fed’s aggressive response to the ongoing economic challenges. However, there remains a great deal of uncertainty over where rates will eventually peak, and there is a real concern that the Fed will end up over-tightening and will tip the US into a painful recession as a result.”

He noted that the Fed will likely slow down, a suggestion that Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management, agreed with.

She expects the Fed to be more mindful of the lagged impact that interest rate rises have and for the bank to therefore slow down. “We expect a downshift to a 0.5 percentage point pace at its next meeting in December,” she said.

Charles Hepworth, investment director at GAM Investments, suggested the Fed could stop at 5%, which implies a further 1 percentage point rise, but said this won’t happen in one go.


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