The Bank of England (BoE) raised interest rates by 25 basis points to 4.5% this afternoon, piling more pressure on households struggling with rising costs.
This 12th consecutive hike by the Bank is an effort to slow inflation, but more increases are needed over the coming months to drag the consumer price index (CPI) down from 10.1%, experts have warned.
Interest rates will likely be bolstered by 25 basis points at the next two monetary policy committee meetings, bringing them up to 5% by September, according to James McManus, chief investment officer at Nutmeg.
UK inflation over the past 10 years
Source: Office for National Statistics
Many people in the UK are already struggling amid the cost-of-living crisis, so additional hikes are likely to cause more pain.
Oliver Faizallah, head of fixed income research at Charles Stanley, said: “Going forward, the Bank of England have a very difficult job, navigating high inflation with a fragile economy.
“Consumers and corporates alike will likely start to feel the strain, not only from higher base rates but also tighter banking lending conditions.”
Indeed, the Bank is treading a fine line between supporting growth and quelling inflation – too aggressive action over the coming months could stunt economic activity.
Vivek Paul, UK chief investment strategist at BlackRock, said that there are two routes that future growth could take.
“There’s the benign one, which suggests the economy is proving resilient to the effects of higher interest rates, or the pessimistic one suggesting that the full extent of the lagged damage is yet to occur,” he explained.
“Continued resilience may ultimately mean more work for the BoE in terms of rate hikes; yet-to-be-seen lagged damage may mean it’s closer to stopping.”
The economy has remained fairly resilient to the Bank’s monetary tightening, according to McManus, but further hikes could disrupt an otherwise sturdy economy.
“Growth has certainly been subdued, but the consumer is bouncing back with increased confidence and demand for food services, pubs and restaurants, despite the cost-of-living headwinds,” McManus said.
“While consumption is yet to return to pre-pandemic levels, a strong UK job market should continue to support consumer activity as we move into the summer months.”
Some of the worst affected by today’s hike will be homeowners, although fixed mortgage rates won’t be directly impacted, according to Myron Jobson, senior personal finance analyst, interactive investor.
These are based on future expectations, but those with variable rate mortgages or those nearing the end of the deal could encounter trouble.
Jobson said: “The approximately two million borrowers on variable rates could see their monthly mortgage payments increase – at a time when many can least afford it.
“Those approaching the end of their mortgage deals could benefit from being proactive in seeking the best deals now to have more options on the table further down the line.”
He added that people shouldn’t be concerned about borrowing as personal loans and car financing are rarely affected by rate hikes, but interest on credit cards and overdrafts could fall.
Whilst this presents a problem in many ways, it does create some alluring investment opportunities now that UK equities are cheaper, according to Rachel Winter, partner at Killik & Co.
She said: “Whilst this news will be met with mixed reactions, higher rates can dampen the stock market and this could present a good opportunity for investors to bolster their portfolios as share prices remain low relative to last year.”
Today’s decision follows another hike by the Federal Reserve (Fed) last week. The US’s central bank also upped its interest rates by 25 basis points, bringing them up to between 5% and 5.25%.
Many analysts expect this to be the last of the Fed’s hikes, with rates likely to stay at this level until inflation subsides.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “We believe the Federal Reserve’s tightening task is now possibly done. The Fed has material dry powder it can use to good effect when the economy may later on need some stimulus.”
However, Faizallah said that the Fed will have a simpler time than the BoE when it comes to lowering rates because inflation is coming down at a faster.
“This hike was the same in size as the Federal Reserve and European Central Bank last week, however the Bank of England remains in a uniquely difficult position,” he added.
“While inflation in the US continues to head in the right direction, UK headline inflation remains persistently above 10%, and core inflation is well above target at over 6%.”